##ulation. this field of research has been mostly empirical. theory has been slow to explain destabilizing behaviour in a way that would be applicable in practice. banking crises can be interpreted an extreme manifestation of the financial cycle phenomenon. there is a lot of empirical literature on their early warning indicators. because no country has had enough banking crises to have a representative sample of them, this literature is almost exclusively based on panel data. for instance, recent working papers published by the european systemic risk board and the bank of finland have systematically tested the predictive power of different early warning indicators. banking crises are in most cases preceded by three parallel phenomena, namely excessive credit growth, house price bubbles and large current account deficits. these three phenomena preceded the scandinavian crises more than 20 years ago, as well as the most extreme recent crises in europe and the great recession of the u. s. banks ’ increasing bis central bankers ’ speeches reliance on money market funding other than retail deposits is also observed quite regularly in the development before crises. therefore, the archetypal banking crisis is preceded by a phase when banks finance the current account deficit by borrowing in international wholesale markets and channel this funding to the domestic economy by granting loans to customers who buy real estate. although business loans are more likely to be written off as loan losses, macro level studies have found housing loans more destabilizing than corporate loans. ( detken et al 2014, kalatie & al 2015 ) according to claudio borio, we can measure the credit cycle phenomenon pretty well just by focusing on credit volumes and property prices. judging by the results from standard filtering techniques, the credit cycle seems much longer than the ordinary business cycle, possibly about 15 years. if anything, financial cycles are becoming longer and more pronounced. some academics, including martin hellwig and charles goodhart, have even argued that the capital requirements have actually amplified the financial cycle ; banks restrict lending when capital adequacy requirements are about to be violated, which slows down economic growth and puts downwards pressure on asset prices, worsening credit risks. financial cycles in finland ( slide 2 ) what has finland learnt on the financial cycles as a small country and a member of the monetary union? at the moment, it seems that being a member of the monetary union has had a rather limited direct impact on the cycle in finland. the finnish financial sector has been rather well insulated from the instability experienced in some other member countries. three bank of finland economists, adam gulan,

should have been created already when times were calm and their activation was not immediately not required. macroprudential policy in the euro area along with single banking supervision within the banking union, the european central bank was also given a mandate in macroprudential policy. the ecb can impose more – but not less – stringent requirements than the actions taken at national level on the basis of eu legislation. ( slide 3 ) the purpose of these asymmetric powers of the ecb is to prevent what is called the inaction bias in the conduct of macroprudential policy by national policy - makers. this bias towards inaction might arise because the deployment of macroprudential instruments is unpopular and tends to meet with opposition from the banks and their customers alike. in the euro area, governing council of the ecb has an important, although a shared responsibility in the macroprudential field. this has the advantage that national analysis is complemented with independent ecb analysis and the state of the euro area as a whole being reflected in policy actions. for example : in a monetary union where monetary policy is designed for the area as a whole, it may be unable to temper national credit cycles. nationally targeted macroprudential policy is useful and it needs to take the limitations of monetary policy into account. national credit cycles vary both in frequency and amplitude. for this reason, the development of macroprudential policy is of particular importance for the euro area countries. national authorities ’ role is very important in the conduct of macroprudential policy within a monetary union. the analysis of the macroeconomic situation and the local conditions is the foundation for policy making. one function of national macroprudential policy is also to act as first line of defense against systemic risks. that benefits a country ’ s neighbours as well : in integrated markets, systemic risks and problems spread rapidly across sectors and borders. the macroprudential framework in finland ( slide 4 ) the finnish macroprudential framework is pragmatic. in a small country the framework was built on within the existing institutional structures. a close co - operation between the relevant institutions is of key importance and in particular the synergies between the central bank ’ s maroeconomic expertise, [ macroprudential analysis ] and supervisor ’ s regulatory and institution - specific expertise. the decision making body is the board of the finnish supervisory authority ( fin - fsa ), chaired by the deputy governor of the bank of finland.