##orably during the boom, on the back of aggressive risk - taking and leveraging, had finally started to unwind. as elaborated in the bis annual report ( 2009 ), financial cycles are exacerbated by inherent difficulties in measuring risk and by distortions in incentives. episodic financial strains cannot be eradicated entirely ; the market is not fully self - correcting. but they can be mitigated or magnified by policy. the crisis events can be traced to evidence of serious trouble emerging from when banks became less willing to lend to each other, because they were no longer sure how to value the assets held and the promises made – both their own and those of potential borrowers. for a time, central bank lending was able to fill the gap. but from august 2007 the stress in the financial system increased in waves. by march 2008, we are all aware, the crisis deepened and bear stearns had to be rescued from failure ; six months later, on september 15, lehman brothers went bankrupt ; and by the end of september, 2008 the global financial system itself was on the verge of collapse. global crisis : us, europe and emerging market economies in the united states, the crisis was shaped by particular characteristics of the us financial system such as a complex mortgage financing value chain with opaque securitization structures, a large “ shadow financial system ” involving various poorly regulated intermediaries ( investment banks, hedge funds, structured investment vehicles – sivs ) and instruments ( credit default swaps ), the important role played by government - sponsored enterprises ( fannie mae and freddie mac ), as well as a fragmented supervisory architecture. the us financial system is in many aspects unique due to the high share of capital market intermediaries and instruments. “ deposit money banks ” account for a relatively low share of financial system assets ; the stocks of market instruments are significantly larger ( including private bonds ), and the ratio of claims on the private sector to deposits is much higher. overall, these indicators reflect the much greater role played by large investment banks, institutional investors, and other financial institutions, as well the extensive use of securitization. while financial institutions in the us are at the heart of the problem, european banks face similar problems which shows how deeply interconnected national financial systems have become. european banks have been hit nearly as strongly as their american peers by losses from subprime mortgage investments, leveraged loans, failed financial hedges and a surge in conventional credit losses.

3 million jobs. using a similar methodology, bank of canada researchers estimate that the increase in policy uncertainty observed since the reintensification of the euro - area crisis late last year may have lowered the level of euro - area gdp by roughly 1 per cent. analytically, there is a clear question of causality here – does uncertainty cause slower growth or is it the other way around, with difficult economic times inducing greater qualms about the future? surely it works both ways. thus, the current combination of economic weakness and heightened uncertainty may be forming a vicious circle in the global economy. that there is uncertainty about how the global economy will respond to an unprecedented period of deleveraging is not surprising. more troubling is the apparent uncertainty about the stance and perceived effectiveness of economic policy. the question is what can policy - makers do about it? europe let me start with europe. the euro - area economy is stagnating, with gdp still 2 per cent below its pre - crisis peak and private domestic demand a stunning 6 per cent below. the causes of this underperformance are deep - seated. an adverse feedback loop between weakening economic activity and sovereign and banking sector vulnerabilities has made the task of fiscal consolidation even more difficult. the vix refers to the chicago board options exchange volatility index, a popular measure of the implied volatility of s & p500 index options. it represents a market estimate of short - term stock market volatility. s. baker, n. bloom and s. davis, “ uncertainty and the economy, ” policy review 175 ( 2012 ). the index incorporates newspaper coverage of policy - related economic uncertainty, the number of tax code provisions set to expire in future years and the extent of disagreement among economic forecasters. bis central bankers ’ speeches europe ’ s banking losses and fiscal shortfalls are merely symptoms of a more serious underlying illness – a balance - of - payments crisis. to repay the creditors of europe ’ s core economies, the debtors of peripheral economies must regain competitiveness. although there has been some progress, this process will be neither easy nor quick. there are two ways to address the uncertainties plaguing europe. first, europe is often said to be suffering an existential crisis – meaning that the very existence of the euro is being questioned. recent actions, particularly by the european central bank ( ecb ), are now directly addressing this risk. the ecb has recently introduced a new