markets ) and financial sector policies remain a strict national competence. pursuing financial stability and integration as joint objectives requires true european level policies. this is particularly illustrated in a ecb working paper by holthausen and ronde ( 2004 ) 4 showing that with increasing financial see, e. g. gros, d ( 2012 ), “ an incomplete step toward banking union ”, ceps discussion paper. first put forward in padoa - schioppa, t. ( 1982 ) “ capital mobility : why is the treaty not implemented? ” address to the second symposium of european banks and reproduced in padoa - schioppa ( 2000 ) “ the road to monetary union in europe ” oup. see also paul krugman ( 1987 ) “ economics integration in europe : some conceptual issues ” in t. padoa - schioppa “ efficiency, stability and equity ” oup and obstfeld, m, j. shambaugh, and a. taylor ( 2005 ), “ the trilemma in history : tradeoffs among exchange rates, monetary policies, and capital mobility ”, review of economics and statistics 87, 423 – 438. schoenmaker, d. ( 2011 ) : “ the financial trilemma ”, in economics letters, 111 pages 57 – 59 ; freixas, x. ( 2003 ) crisis management in europe. in : kremers, j., d. schoenmaker, and p. wiert ( eds ) 2009, “ financial supervision in europe ” edward elgar p. 141 – 165. holthausen, c. and t. ronde ( 2004 ) : “ cooperation in international banking supervision ”, ecb working paper 245. bis central bankers ’ speeches integration, pursuing national financial policies will generally not lead to financial stability, because national policies seek to benefit national welfare, while not taking into account externalities of their supervisory practices on other countries. this leads to an underprovision of financial stability as a public good. from a different perspective, goodhart and schoenmaker ( 2009 ) 5 show, both in a model and using european data, that a coordination failure emerges when ex - post coordination among different national supervisors leads to an underprovision recapitalisation of cross - border banks after a banking problem. a lesson of the trilemma is, therefore, that it is beneficial for the provision of financial stability to replace national policies with policies at the supranation

debt. as a third factor, we have observed clear imbalances in global governance. still at the current juncture we must be aware of the shortcomings in the international financial architecture. here, it is not necessarily the analysis that was the problem : the rising risks in the global financial system were identified in the process of international cooperation. the imf coordinated a multilateral consultation in 2006 - 07 to address global imbalances. the g7 and the g20 regularly flagged concerns related to imbalances in their communiques. policy recommendations were developed, but not appropriately enforced during this period. also, the dangers of a sharp and abrupt correction were not generally perceived as grave and quasi - immediate. i have to say that in this respect it is in the constituency of central banks that we can find the clearest public statements on the need for the private sector to prepare for a very serious market correction. this was the sentiment of the global economy meeting of central banks governors in basel as early as 2006 and the beginning of 2007. and the bank for international settlements itself in its own research had been the most lucid of the international institutions. the course of action to be undertaken looking ahead, what actions should be undertaken to redress imbalances in the global financial system, in macroeconomic policies and in international governance? for the financial system, there is a need for more stringent regulation. such regulation needs to prevent a recurrence of the excesses witnessed in financial markets and must impose a much more stability - oriented perspective. the financial stability forum has already identified the key avenues for reform. these include three policy areas where change is particularly warranted, in my view : • first, introducing incentives and rules to prevent the financial sector from focussing excessively on short - term returns ; • second, improving transparency as regards risks to the financial system, as well as regarding institutions, instruments and markets that are currently unregulated or insufficiently regulated ; and • third, eliminating, wherever possible, the elements that amplify the tendency of the financial system to accumulate excessive risks and leverage in good times, and to shed risks hastily in bad times – i. e. dampening pro - cyclical tendencies. i have dwelled upon these three issues on other occasions. these points are also reflected in the g7 communique issued last saturday, and i will not elaborate on them further. what i would like to emphasise today is the overall setting of macro