excessive private indebtedness. preventive recommendations are provided to member countries at an early stage in the formation of imbalances. the severity of the financial crisis has also exposed the inadequacy of the current financialsector regulation and supervision. as already indicated, macro - prudential risks were overlooked and the link between sovereigns and banks was underestimated. in reaction to this, european institutions and member states have engaged in a major overhaul of bank regulation and supervision with the objective of creating safer, sounder and more transparent financial institutions. one of the major initiatives to strengthen the governance framework was the establishment of the european systemic risk board ( esrb ). in its first year of operation, the esrb tackled key issues relating to the interaction between three factors : the creditworthiness of european sovereigns, the increasing difficulty of banks in raising funds, and weakening economic growth. furthermore, the esrb adopted three public recommendations on : i ) the macro - prudential mandate of national authorities ; ii ) lending in foreign currencies ; iii ) us dollar - denominated funding of credit institutions. it is important to note that the voting members of the general board of the esrb include the governors of national central banks. indeed, esrb activities are based on strong cooperation between its members. a key part of the esrb ’ s work is to combine the analysis produced by the micro - supervisors and central banks. clearly, the central bank ’ s role of ensuring financial stability has extended to the international level, implying further responsibility in decision - making. in malta, the cooperation between micro - and macro - supervision is embodied in the setting up of the joint financial stability board. the central bank of malta, in its capacity as the macro - prudential authority, has agreed with the mfsa to set up a joint financial stability board which will be formally constituted in a few weeks. the objective is to enhance the cooperation between the two bodies for the assurance of the stability of the financial system. the intention is to strengthen the resilience of the financial system and to mitigate the buildup of systemic risks. to these ends, the board ’ s mandate includes the development of mechanisms that would identify risks to financial stability, and the establishment of the necessary macro - prudential policy tools. the joint financial stability board will also be able to make recommendations to the cbm or mfsa boards on macro or micro prudential issues, as the case

matched by adequate capital protection. systemic risk was exacerbated via strong linkages between financial institutions. economic fragilities were worsened by the burden imposed on government budgets by bank bail - outs, the lack of market funding available to sovereigns, and the negative impact of sovereign debt downgrades on bank balance sheets. lack of trust spread across the euro area, with this contagion creating a mutually reinforcing loop between weak sovereigns and bank credit conditions. although policies have now been in crisis management mode for five years, the interbank market has yet to return to its normal state, reflecting the extent of the lingering damage within the financial sector. to a considerable extent, the common currency masked vulnerabilities related to the build - up of various imbalances, since such imbalances could no longer be addressed by exchange rate corrections. bis central bankers ’ speeches these factors have raised questions on the viability of the european single currency model as this has perhaps failed to achieve the targets it was primarily set - up for. the extent of these fragilities is reflected in chart 1, which shows a convergence in sovereign yields in the run - up to the formation of the monetary union, followed by a decade - long stability. in retrospect the low yields were clearly not consistent with the underlying fiscal positions or economic fundamentals at the national level. indeed, low interest rates enabled governments to pile on additional debt at relatively cheap interest costs. this period coincided with deterioration in competitiveness and wider current account deficits as peripheral countries continued to finance such deficits via capital inflows. eventually, when markets switched their focus to economic sustainability, the flow of capital reversed direction, sovereign debt was downgraded and yield spreads widened dramatically, as seen in chart 1. chart 2 provides a contrast between two groups of countries. it focuses on the current accounts of euro area countries ( as per cent of gdp ) and shows the difference between various countries running generally current account surpluses, and selected countries in the periphery with a negative balance. these deficits are financed by a corresponding capital flow in the opposite direction. for each year, the upper band depicts the range of current account surpluses for a group of countries that include germany, luxembourg and the netherlands. similarly, the lower range depicts the corresponding range of deficits for cyprus, greece, italy, portugal and spain. the divide between the groups is notable and it is not surprising that those countries in the lower part of the