200 200 200 200 200 / 200 / 200 / 200 / 200 / 200 / 200 / 200 / 200 / 200 / 200 / / / / / / / / / / / / / / / / / / / 1 / 01 / 04 / 07 / 10 / 01 / 04 / 07 / 10 / 01 / 04 5 / 07 5 / 10 5 / 01 5 / 04 5 / 07 5 / 10 5 / 01 5 / 04 5 / 07 5 / 10 5 / 01 5 / 04 5 / 07 5 / 10 5 / 01 5 / 04 5 / 07 5 / 10 5 / 01 5 / 04 / 05 05 05 05 05 05 05 05 05 05 0 does this mean that the eurosystem is passive, or at least relatively more passive than other central banks? in the opinion of the eurosystem, activism cannot be quantified by the frequency or size of changes in interest rates. activism refers to a strategy, not to policy implementation or changes in a policy instrument. a central bank should be as active as it needs to be in order to fulfil its mandate. what matters, is that the eurosystem is permanently pursuing its primary objective and that it is constantly on alert to risks to price stability. moreover, how often and by how much a central bank should adjust interest rates in order to maintain price stability depends also on the structure of an economy and the type and frequency of shocks it is subject to. several remarks can be made here. - the euro area, compared with the usa, is more rigid and a central bank operating in a relatively rigid economy is able to deliver the same degree of monetary accommodation by adjusting its interest rate in more moderate steps than in a more flexible economy. - the type of shocks affects the optimal reaction by the central bank. in case of a demand shock, forecasted inflation and output move in the same direction, leading the central bank to adjust rates more often and to a greater extent. by contrast, supply shocks cause more substantial transitory increases in inflation, possibly followed by second round effects. it is advisable for the central bank to adjust its policy instrument only to the extent needed to neutralise the anticipated more permanent effects of the shock on inflation over the following months or quarters. as, relative to the usa, the euro area seems to be exposed to demand shocks of smaller magnitude but to be hit more frequently by supply shocks 2, less frequent and less forceful changes in the policy instrument seemed appropriate. j

the use of stress tests in lieu of value - at - risk for new risks or products with a short history ; the use of “ dynamic provisioning ” as introduced by the bank of spain, an approach that involves building up anti - cyclical buffers during expansions and offers the possibility of drawing them down during recessions. in fine, the pro - cyclical effects arising from the interplay between leverage and valuation need to be assessed from a financial stability perspective. common, eu - wide stress testing of the overall banking sector is another area of regulation in which central banks can perform an important role. the objective of stress testing is to assess the resilience of the banking sector along with its ability to absorb shocks. whereas supervisory authorities remain responsible for stress testing of banks on an individual basis, central banks would conduct analyses in order to determine aggregate need for capital and liquidity requirements. these testing procedures, based on common scenarios, would focus on macroeconomic shocks and the resulting response of the banking sector. the tests would focus on credit risk, equity price risk, foreign exchange risk, interest rate risk and liquidity risk. as an example of the stress testing, the recent ecb exercise shows that euro area 16 large and complex banking groups ( lcbgs ) are forecast to lose approximately 200 billion euros due to credit risk exposures, a figure that illustrates the importance of stress testing national banking sectors ( see text chart ). additional simulations performed by the ecb show that to meet a tier 1 capital ratio of 10 percent, 47 billion euros in additional capital would be required by the group of 16 lcbgs. if instead of raising capital, the same set of banks reduced risk - weighted assets, simulations show that risk - weighted assets should shrink 469 billion euros. shortfalls and deleveraging would be even larger on the basis of leverage ratios, such as the core tier 1 to tangible assets. finally, last april, the efc requested the cebs to coordinate eu - wide stress testing of the banking sector. these exercises, built on common scenarios derived from the ecb adverse scenario, are designed to assess the resilience of banks and the implications for financial stability of the eu banking system as a whole on a consistent and comparable manner. the regulatory paradigm that relies on self regulation has proven to be insufficient. recent proposals for a new regulatory framework put forward by the de larosiere group and the obama administration are poised, along with the work by central banks and supervisory authorities