strong horizontal focus, across countries, across sectors and across the boundaries between the financial sphere and the real economy. interlinkages and spillovers should be key terms in its analysis. to achieve these tasks, the esrb is drawing on information from many sources, including strong analytical input from its members ; intelligence gathered from financial system participants ; and the data necessary to understand the nature of interlinkages that define the financial system. esrb analysis must be broad - based covering potentially any aspect of the eu ’ s financial system – markets, institutions and infrastructure. the esrb is being established at a time when the concerns of markets and policy - makers about short - term vulnerabilities seem to prevail over perceptions of medium - and longer - term risks. this confronts the esrb, as well as other macroprudential bodies around the world, with specific challenges. the esrb needs to consider what activities to initiate, well before a fully - fledged macroprudential policy framework is developed in the medium term. at the same time, it must develop this policy framework, for which no template exists and for which the analytical background captures only parts of the tasks. in the medium term, the esrb and the macroprudential authorities of the 27 eu countries will need operational policy frameworks with specific instruments. the esrb is ready to support – at a technical level – the work that european institutions have started to design the implementation of countercyclical capital buffers. other macroprudential instruments are also desirable. work on these issues has been initiated. for example, new rules on margins and collateral should counteract the fluctuations of the cycle. the specific capital requirements for risk - weighted assets might also be adjusted over the cycle. when these macroprudential instruments are established, possibly around the middle of this decade, the authorities will finally have tools to mitigate the pro - cyclical behaviour of financial bis central bankers ’ speeches players. authorities will set part of the regulatory requirements not against the solvency or liquidity situations of single institutions, but taking a view of the macroprudential cycle. other instruments will be needed to address interconnectedness, including the most complex and innovative elements of market functioning. one specific focus of authorities is to ensure that efficient and secure central counterparties are created to reduce risks in otc markets. concentration risks produced by increasingly large financial institutions in trading and posttrading will also need to be addressed. finally, authorities will need

experience have proven, market assessments of the solvency of countries tend to be wrong. in the vast majority of cases, sovereign risk is overestimated or underestimated over a long period. this is because sovereign risk does not depend only on debt sustainability, but also on the political will to implement adjustment programmes, including privatisations and structural reforms. second, at times markets have perverse incentives. in particular, large investors who have bought insurance against sovereign default, often without holding the underlying asset, stand to benefit greatly from the default and lobby in favour of it. they tend to encourage naive governments to believe that debt restructuring can be done in an “ orderly way ”, distracting them from implementing the appropriate policy adjustment. third, default or debt restructuring is a dramatic economic and social event for the country which experiences it – i would call it political “ suicide ” – which leads many into poverty, as experience has shown. it is thus rather peculiar for policy - makers to design policies mainly with the aim of punishing ( or rewarding ) certain categories of investors, rather than considering the ultimate consequences for the people. finally, if the euro area were to go down the path of leaving it entirely up to the markets to decide which countries are solvent and which are not, it would put the euro at a disadvantage compared with all other major currencies. this is confirmed by the fact that since midoctober 2010, when the idea of private sector involvement in programmes to assist countries experiencing difficulties was voiced at the highest political level, and in spite of subsequent clarification that in fact no change had occurred in prevailing practices, some euro area market segments have severely suffered. the benefits of a deep and liquid financial market where international investors feel safe to invest have been jeopardised, undermining the competitiveness of the euro. the alternative is for policy - makers to take responsibility and strengthen the economic governance framework of the euro area, in at least three ways. first, the governance framework underlying budgetary policy requires bold changes, with greater automaticity and stronger commitment on the part of policy - makers to ensure full compliance with the stability and growth pact. 3 the ecb published a long article on its views in this regard in the march 2011 issue of the monthly bulletin. bis central bankers ’ speeches second, further progress should be achieved in the implementation of the single market, strengthening the “ economic leg ” of emu. finally, we need to further integrate regulatory and supervisory institutions