. with the reversion of the housing and credit cycles, and the drying up of liquidity in certain market segments, a substantial part of these exposures turned out to be overpriced, pressing financial institutions to book substantial losses. clearly, risk management failed to provide accurate signals for institutions to build up sufficient cushions that could absorb losses, when materialized. second, financial institutions came short of addressing the flawed incentives created by the originate - and - distribute model. recent events have revealed again that sound underwriting standards are key for preserving stability both at firm and systemic levels. over the period preceding the market correction we had seen credit standards declining substantially across the board, triggering an unprecedented surge in delinquencies on sub - prime mortgages recently. as unfavourable events continue to unfold, with house prices declining and economic growth decelerating in many countries worldwide, financial institutions have to face further write - downs on their low quality exposures. third, the lack of transparency throughout the securitisation process that engineered the underlying mortgages into complex structured products made it difficult for market participants to identify where the risks were accumulating in the financial system and to assess the possible losses from these exposures. this opaqueness of the securitisation process, accompanied by investors ’ over - reliance on, and poor understanding of, external ratings, seriously undermined investor confidence and continue to put strain on the financial markets. fourth, with liquidity strains characterising certain market segments, it became impossible for firms to properly value a range of financial assets and off - balance sheet exposures. admittedly, the existing standards on valuation and accounting proved to be inadequate for illiquid markets. the sources of the current turbulence on financial markets are manifold. so are the consequences. what we can see now is that financial institutions are becoming increasingly under pressure to clean their portfolios and to strengthen their capital base, reinforcing the rapid de - leveraging process already underway. these tendencies, accompanied by increasing risk - aversion and the tightening of credit standards, may have substantial impacts on the real - economy that policy makers should be aware of. in this context, regulators and supervisors have to face the challenge of finding the narrow path between giving prompt and adequate responses to current developments in the short run, and mitigating the mechanisms that may fuel the downward spiral of financial and economic contraction in the longer term. since the very beginning of the financial market turmoil, public authorities at the

over the entire maintenance period. second, the ecb has used the flexibility offered by its operational framework and has broadened the modalities according to which the liquidity was allocated to the banking system. specifically, the ecb : 1. has made more frequent use of fine - tuning operations ; 2. has conducted supplementary long term refinancing operations and consequently has lengthened the average maturity of open market operations, and 3. has applied on few instances a special tender procedure with full allotment. third, the ecb has strengthened its cooperation with other central banks, in particular by coordinated steps to provide usd liquidity. as you know, we have decided yesterday to engage with the federal reserve system in a swap agreement of an amount of usd 240 billion. as a result of all these actions, the average level of eonia, the euro overnight index, has remained close to the minimum bid rate despite higher than usual volatility from a historical perspective. while refraining from being complacent, developments over past months show that the ecb ’ s operations have positively impacted money market conditions in the euro area. let me emphasise that the ecb will continue to support solvent banks ’ access to liquidity and the functioning of the money market as long as necessary. ii. lessons and recommendations to be drawn in terms of financial stability and supervision i would like to discuss some lessons that we have drawn in terms of financial stability and supervision from the present turbulences. let me start by providing you with a broad - brush picture of the main weaknesses of the financial system and the regulatory framework that have been revealed by recent events on global financial markets. a thorough understanding of the underlying developments as well as the identification of the nature and scope of shortcomings in the financial system are key for providing proper guidance for policy makers, responsible for promoting financial stability. in particular, the fact that the financial system is globally integrated and that developments in various markets are often strongly interwoven and even mutually reinforcing, makes this task particularly challenging for all of us. first, the root of the problems for many financial institutions affected by the market distress was their inability to adequately assess the risks associated with the exposures they held, either directly in their books, or indirectly, via off - balance sheet entities. imperfections in risk management systems as well as in risk governance proved to be substantial contributing factors to the accumulation of exposures whose long - term risk characteristics were not properly identified in advance