regulation in which it is complemented by the newly developed mechanisms for surveillance including across borders, strengthened supervisory oversight and institutional arrangements for resolution. central banks and financial markets a more recently much discussed mandate is the role of the central bank in ensuring the orderly functioning of financial markets. orderly functioning financial markets are vital not only for the efficient allocation of financial resources in the economy but it is also essential for the transmission of the monetary policy and for preserving financial stability. while competitive forces are expected to result in efficient and optimal outcomes, central banks in emerging economies have had the important role of balancing between the market forces and intervention with the objective of ensuring the orderly functioning of the financial markets. it needs to be recognised that several important preconditions need to be in place to generate equilibrium prices that reflect the underlying fundamentals. this includes the institutional and market infrastructure, the incentive structure, the rules of the game and the level of financial literacy that recognise and understand the market signals. when these elements are still yet to be fully developed in many emerging economies, it increases the risk to instability. thus, as a result of the stage of development of such markets, or its size or prevailing market imperfections, emerging economies have tended to be more vulnerable to greater volatility and circumstances in which markets do not self - equilibrate. the recent global financial crisis has shown that such dislocations have occurred even in developed financial systems. institutional structures and rules that become deficient and less relevant heighten the risk for such unstable market conditions. experience has also shown that such market dislocations have severe and far reaching adverse implications on the overall economy. for the effectiveness of such interventions, however, there needs to be clarity in the objectives to be achieved by such central bank presence and the results that are expected to be delivered. of importance, there needs to be the recognition of the temporary nature of such interventions and the challenge of efficiently unwinding such presence when the objectives are achieved. there is also the need to manage the risks of unintended consequences of such direct central bank interventions. such risks could include the potential for circumvention, or the gravitation to other markets not protected by such intervention. there could also be potential costs associated with such interventions, not only the current costs, but also the cost to future generations. while the pace of deregulation and liberalisation may differ across emerging economies, there is a discernable distinct shift to greater market orientation in this

differ in their regional impact. these risks are also expected to increase in the coming decades, with some likely to be concentrated in particular geographical areas. floods are the most significant hazard in central and northern europe, for example, while heatwaves, droughts and wildfires represent the greatest risks in southern europe. taken together, around 30 % of the credit exposures of euro area banks are to businesses with high or increasing exposure to at least one source of physical risk. ultimately, the impact of climate change on financial stability depends on the degree of concentration of exposures, and what mitigation measures are in place. both fronts give cause for concern. over 70 % of identified physical risk exposures in the euro area are held by just 25 banks. there is also a notable concentration by country ( chart 2, left panel ), suggesting that physical risk could become a prominent source of asymmetric shocks. moreover, the physical collateral backing loans may itself be damaged by the event, exacerbating the risk to banks. chart 2 exposure concentration and insurance as a mitigating factor sources : anacredit, 427 data, emdat, oecd and ecb calculations. notes : left panel : credit exposures to non - financial corporations ( nfcs ) above €25, 000 are considered ; €4. 2 trillion of exposures overall ; nfc location used to assign risk levels refers to the corporations ’ headquarters ; country breakdown refers to the bank ’ s country of residence. right panel : sample includes 45 countries for which the oecd provides quarterly gdp data from 1996 to 2019. the chart shows the impact of large - scale natural disasters ( i. e. with total damage larger than the third quartile at 0. 1 % of gdp ) when the share of insured losses is high ( above the median of 35 % ) on the left, and low ( i. e. below the median of 35 % ) on the right. the estimates are obtained using a panel regression model where the dependent variable is the year - on - year difference in the log of gdp and the explanatory variables include two dummies capturing large - scale disasters with a high and low share of insured losses respectively ( included with up to three lags ), and country and quarterly fixed effects. for the quarter including the date ( s ) of the disaster ( t = 0 ) and the three subsequent quarters, the y - axis measures the percentage point impact of