offset by rules of conduct and disciplinary procedures aimed at preventing crises. it was expected – perhaps naively – that the rules would be respected. but then, what was the alternative? to wait, as some had suggested, until the necessary conditions were created for a more complete fiscal and political integration before proceeding to monetary integration? that would risk delaying monetary integration and seeing a repetition of the turbulence, and perhaps led to an implosion of the system and of the single market. it was then decided to make a start to monetary union without taking into account the possibility of serious financial or budgetary crises of the member states. this type of behaviour is not surprising. it characterises innovation in general, even in the institutional field. the first cars did not have advanced safety systems such as reinforced bumpers or air bags to protect drivers. neither could they have been developed and patented before the first car appeared on the road. people had trust in the prudence of drivers, in the slow speed of the first cars and presumably believed that the limited number of cars on the road would keep accidents to a minimum. after realising that the accident rate was far higher than expected, the car makers decided to develop better systems of protection and the public authorities decided to regulate the issuing of driving licences. the experience of the first ten years of euro has shown that even with strict rules of conduct and coordination mechanisms the members of a monetary union may find themselves in a financial and budgetary crisis. the reasons vary. one is the circumvention of the rules, as in the case of greece, which managed to double its public deficit for many months without notification. a second reason is the accumulation of financial imbalances in the private sector, which in the event of a crisis can become public debt. under these conditions a country may lose access to the financial markets. what is described in the literature as a “ sudden stop ” in the influx of capital occurs. this phenomenon is typical of developing countries, which borrow in foreign currency to facilitate the inflow of capital. in advanced countries this type of problem is rare because the debt is generally denominated in the national currency, and if need be the central bank moves in and funds the treasury, replacing private operators. the credit risk of the sovereign issuer is avoided, and transformed into a risk of monetisation of public debt and therefore of inflation. the euro area is in a particular position even for the constraints that are applied every time a step towards further

as an inefficient use of shareholders ’ money. the underlying perspective can be compared to that in the corporate sector many years ago, when technological innovation led to the widespread introduction of the “ just - intime ” model of doing business. this meant that firms held minimal inventory levels throughout the production chain. the result was a system that looked very efficient but that was very vulnerable to shocks. something similar has happened to the financial system in recent years : the pressure to increase immediate shareholder value and short - term returns drove a number of institutions to limit their reserves and buffers to the minimum possible levels. and just as in manufacturing, the result has been a system that produced very high returns in the short term, but which proved vulnerable to shocks. comparing the ex post returns with the considerable costs of the current turmoil, we have to realise that our financial system as a whole, including its non - regulated and non - listed entities, was neither strong nor efficient. it did not allocate capital properly, and it did not manage risks well. i have sometimes compared financial buffers with air bags in a car : what we have done in recent years is let part of the financial sector remove all the air bags. and now there has been an accident, we can see the scale of the injuries. we have to put reserves and buffers back into the system ; they are the protection against serious damage in a downturn, and they are an integral part of sound finance. such a large - scale reassessment is a matter for the medium term. in the present circumstances i wish to underline that banks should not be requested to hold more capital than is required by the existing capital framework. we should not today introduce “ pro - cyclical ” changes in the regulatory framework at a time when we are already observing a market - driven deleveraging of the first magnitude. 3. the third goal is reforms that are holistic in scope. in this respect, an important issue, which i ’ m sure will be addressed by today ’ s conference, relates to the scope of financial regulation and prudential oversight. the current crisis is a loud and clear call to extend regulation and oversight to all systemically important institutions – notably hedge funds and credit rating agencies – as well as all systemically important markets – in particular the otc derivatives market. what is currently under discussion is the precise way in which these elements should be integrated into an overall regulatory framework. currently, we are in