them and inducing them to adjust their behaviour. a second option is to strengthen supervisory oversight over financial institutions and markets, with a view to avoiding excessive risktaking. the third option is to achieve the same objective through the use of regulatory powers. the three steps can be summarised as follows : ( i ) alerting, ( ii ) supervising more closely and ( iii ) regulating. the choice of which instrument to use may vary, depending on the severity of the risk and on the circumstances. a major challenge for macro - prudential supervision relates to the decision - making system capable of accommodating these three options. let me provide some illustrations. first of all, addressing certain macro risks may require the adoption of regulatory measures across the board, applying in particular to financial institutions and markets. this may blur the responsibility between macro - and micro - prudential supervision. alternatively, one can follow the suggestion by crockett i mentioned above and distinguish the regulatory and supervisory actions between those conducted at the level of individual institutions and those affecting the whole markets. the supervisory and regulatory measures aiming at containing aggregate risk and externalities would be part of the macro - prudential toolkit, whereas measures aiming at the stability of individual institutions would be part of micro - prudential policy. following this objective - oriented approach, the measures aimed at reducing pro - cyclicality of financial systems would be part of macro - prudential policy. some concrete ideas are being discussed on how to reduce pro - cyclicality, such as adjusting capital requirements to the business cycle ( making them less stringent in bad times and more stringent in good times ), adding maximum leverage ratios or introducing dynamic provisioning rules ( where reserves have to be accumulated in good times and are drawn down in bad times ). 13 measures aimed at dampening pro - cyclicality may also affect compensation structures, transparency and accounting rules, internal governance ( e. g. related to the risk management function ), the design of certain financial instruments, and maturity mismatches. 14 the macro - prudential toolkit would also include measures to reduce contagion and to limit other transmission channels of financial instability. much progress has been made in the last two decades in the area of payment and settlement systems, but more needs to be done, as suggested by the recent debate on central clearing counterparties for otc derivatives. new challenges have emerged as a result of the significant increase in wholesale funding of financial intermediaries, the

wages, which have not always adjusted smoothly across countries, regions and sectors. essentially, this protracted adjustment reflects the fact that national macroeconomic policies and structural reforms have not been ambitious enough to avoid the build - up of imbalances or to provide the economy with sufficient flexibility to deal with the necessary adjustment. without having achieved a sufficient degree of sustainable convergence, the risk of such undesirable boom - bust cycles is particularly high. to conclude, we can indeed be proud of the achievements of the euro. however, there is still scope to draw greater benefits from it. the build - up of macroeconomic imbalances, inside but especially outside the euro area, shows that the surveillance framework in the eu should be strengthened. strengthened surveillance could provide early warnings to policy markers, thereby allowing them to adjust policies early enough. sound macroeconomic policies coupled with a targeted and ambitious structural reform agenda are key in this regard. such policies should be implemented very forcefully, both by countries that participate in the euro area as well as those that are preparing for it.