have similar exposures, may rely on the same funding sources, can be exposed to rising financial imbalances, may comprehend large similar currency or maturity mismatches inducing liquidity vulnerabilities, and can be exposed to large scale underassessment and mis - pricing of risks. in the assessment of the systemic risk of the financial system itself, the judgement on the robustness of financial infrastructures is particularly important. one important issue in assessing systemic risks is to measure the degree of procyclicality which is embedded in the financial system itself, namely the capacity of the system to amplify fluctuations and to produce after a certain period of time, excessive booms and busts starting from relatively modest initial shocks, up or down. this “ procyclical systemic instability ” of the system is itself a complex concept which calls for analysis of the interplay between diverse phenomena such as : herd behaviour, contagion from common or correlated exposures, counterparty relationships, and undesired procyclical effects of prudential rules, of accounting rules, of behaviour of credit rating agencies, etc. another important domain in assessing systemic risk is the analysis of the inter - linkages between the financial sector itself, taken as a whole, and the real economy. financial imbalances often mirror real - economy imbalances. the adverse feedback loop between a fragile system, prone to procyclicality, and the real economy might be devastating, as has been demonstrated by the recent crisis experience. this means that unsound macro - policies over time, including macro imbalances, can themselves trigger financial imbalances, which in turn would aggravate instability and fragility in the real economy. sources of systemic risk are particularly difficult to assess. by definition, they stem from the interrelations between the various elements in the system and are hence inherently complex. we know that the evolution of systems under stress is particularly difficult to capture. furthermore, the materialisation of a risk is very often a sharp, abrupt and rapid non - linear phenomenon which calls for non - standard analysis. for example, in a very large and highly complex financial system, the channels through which risks are propagated are very difficult to capture comprehensively. a deep understanding of leverage, correlations and concentrations of exposures is key in this respect. but the identification of the different channels of propagation does not suffice. the robust modelling of the system is, in

has contributed to this. in addition, the ecb has provided liquidity support to some non - euro area central banks in cases of market malfunctioning or to facilitate the functioning of the international financial system. fiscal policies in the euro area finally, i should like to add a few comments on fiscal exit strategies. many euro area governments are faced with high and sharply rising fiscal imbalances, which are not sustainable over the longer term. this could weaken public confidence in the sustainability of public finances, with adverse effects on market sentiment, leading to less favourable medium and long - term interest rates. unsustainable fiscal positions may also complicate the task of our monetary policy to maintain price stability. communicating credible fiscal exit strategies is therefore crucial in order to anchor expectations. such strategies need include credible measures, notably on the expenditure side. as agreed by the ecofin council last week, governments need to set out concrete and quantifiable adjustment measures that will lead to a sustainable correction of fiscal imbalances. several countries will have to start consolidation in 2010, and all others in 2011 at the latest. 3. systemic risk let me now turn to the last topic we selected, namely the issue of systemic risk in highly interconnected financial systems and ways to address it. systemic risk is the risk of a broad - based break - down of the financial system. it results from an impairment of the financial system, generally resulting from the high degree of interplay and interconnectedness within the system. systemic risk is distinct from the risk that can affect the safety and soundness of individual financial institutions. furthermore, systemic risk, when it erupts, is to be certain to seriously affect the financial intermediation process to such a degree that there are negative spill - overs to the real economy. the crisis has illustrated that systemic risk may be triggered by the collective behaviour of institutions and the manner in which they interact in financial markets. it has highlighted the importance of improving our knowledge and assessment of interconnectedness in the financial system, both via the direct links between financial institutions and the indirect ones created in financial markets. micro - supervisory assessment, institution by institution, typically investigates the vulnerability of each entity, under various assumptions of stress. in contrast, systemic risk assessment investigates the possibility of the whole system, or significant parts of it, being vulnerable, and considers that major risks may emerge from the financial system itself. such risks may arise, for example, because large parts of the system might