capable of indicating when the financial system as a whole or parts of the system are approaching a “ danger zone ”. risk identification calls for the monitoring of a comprehensive set of macrofinancial variables and forward - looking indicators. this task will require a detailed understanding of the channels through which emerging risks are transmitted. i spoke yesterday in cambridge about the analytical challenges underlying systemic risk and the various research avenues that are being pursued. the other challenge for effective macro - prudential supervision concerns the quality of recommendations themselves. here, the key lies in their specificity. the more specific recommendations are, the easier is their implementation in concrete actions. it is here where knowledge of supervisory and regulatory authorities has to enter the equation. it is an important component of macro - prudential assessments and, in particular, in the design of recommendations on the appropriate policy actions needed to contain the build - up of financial vulnerabilities or to mitigate material risks. specific warnings require close input from supervisors, regulators and from all public and private stakeholders. this is the reason why a credible framework of macro - prudential supervision should be set up very broadly, combining a variety of perspectives and closely coordinated with micro - prudential supervisors. macro - prudential recommendations will not be addressed to individual institutions. this remains the sole prerogative of micro - prudential supervisors. instead, they will be addressed to regulators, supervisors or other authorities so as to foster regulatory and supervisory policies. these authorities have instruments which can steer variables such as maturity mismatches, excessive credit growth, leverage, or the risk appetite of market participants. while it might not be desirable or feasible to target these variables directly, prudential policy instruments – individually or in combination – can affect them indirectly. the bank of england released an interesting analysis of the role of macro - prudential policies in november 2009, highlighting many of the analytical challenges as well. the ecb has undertaken a series of research in the field of systemic risk. macro - prudential supervision will not and should not be a substitute for micro - prudential supervision. rather, it should complement micro - prudential supervision ; it has been conceived because the deep integration of the financial system has made it too difficult to ensure systemic stability while focusing on financial institutions one at a time. in providing specific warnings and recommendations, based on a comprehensive analysis of systemic risk, an effective framework of macro - prudential supervision can close the gap between the analysis

framework for macro - prudential oversight at the level of the single market of the 27 member countries of the european union. the single financial market is a crucial component of the overall single market project, and macro - prudential supervision should enhance the resilience of this market. 3. the conduct of macro - prudential supervision the desirability of macro - prudential supervision is clear. and from that naturally spring the objectives – to mitigate and prevent systemic risks to financial stability in the eu on the basis of identified vulnerabilities and systemic risk assessments. now we must turn to my second question and ask how such supervision should be conducted. 2 bis data on foreign claims by nationality of reporting bank ( ultimate risk basis ), 2009q1. see also l. papademos, “ financial stability and macro - prudential supervision : objectives, instruments and the role of the ecb ”, speech of 4 september 2009. almost everywhere in the world, central banks are seen as playing, or called to play, an important role in macro - prudential supervision. in my view there are very good reasons for that. on top of their key involvement in the financial sector, central banks possess three main features that are qualifying themselves for that function : they are, by their very nature, anchors of stability ; they are medium - term oriented ; and they are independent. central banks have traditionally been active in financial stability analysis. of course, from financial stability analysis to macro - prudential supervision is yet another step. financial stability describes the overall resilience of the system, focusing on imbalances and stresses in the financial system in the aggregate. while macro - prudential supervision takes a similarly broad view, it must also focus on specific sources of instability or specific groups of financial institutions, adding the policy component to the oversight function. overall, the effectiveness of macro - prudential supervision depends on many inputs, including quantitative or qualitative information from supervisors, regulators, macroeconomists, market participants and other stakeholders in seeking to identify systemic risks and proposing policy responses. the analysis for systemic risk surveillance and assessment is indeed very demanding, 3 and as much of the credibility of the entire framework depends on it. in my view, the most difficult pieces will be the analysis of the implications of interlinkages in complex systems and understanding how a potential risk might spread throughout the system. risk surveillance and risk detection call for early warning indicators and approaches