me be clear : forty years after the werner report and eleven and a half years after the introduction of the single currency, for me, the verdict is unambiguous : monetary policy within the euro area has been a success. it is widely accepted that the best a central bank can do in supporting economic growth is delivering price stability. the ecb has delivered price stability. even though real gdp in the euro zone has grown by only 1. 5 % per year in the first decade since its establishment, while the us economy expanded by 2. 2 %, this difference can to a large extent be explained by the greater population growth on the other side of the atlantic. on a per capita basis annual real gdp growth rates are very similar, 1. 2 % in the us versus 1. 0 % in the euro area. the euro area ’ s economic growth rebounded strongly in the second quarter of 2010, driven by higher investment and replenishment of inventories. last week the imf revised its figures for growth in the euro area upwards in line with earlier ecb projections. incoming hard and soft data for the second half of the year do not warrant increased pessimism. in the course of the crisis of the past three years the ecb and the eurosystem were forced to act very fast, boldly and innovatively in order to ensure their long term goal of price stability and the functioning of the transmission mechanism. their monetary policy interventions were successful. the recovery of the european economy is ongoing and the tensions in the financial systems have eased somewhat, although it is still too early to claim victory. but we have to draw the lessons from the recent experience. with the eruption of the crisis in september 2008 the accumulation of private debt was suddenly stopped. the problem of excessive indebtedness was not solved, however. fiscal rescue packages, the impact of automatic stabilizers, and the support of the financial system including guarantees to the banking sector led to a significant increase in public leverage to levels unprecedented in peacetime. in other words, parts of the excessive private debt load were shifted to the public sector. the crisis exposed institutional weaknesses. some had their source inside the financial system. despite some initial temptations for re - segmentation of prudential competences, the response will be at the european and at the eu27 level. it will consist of the implementation of new concepts and institutions aiming at de - risking the financial industry. liquidity monitoring through a monthly liquidity coverage ratio

insured and carry no capital. we also need policies on markets that deliver maturity transformation and leverage. this crisis happened partly because the authorities did not keep up with developments in capital markets. i shall not revisit that in detail this evening, other than to say that the bank is glad that its new financial policy committee will have a responsibility for advising hmg when to move the perimeter of microprudential supervision and a power to make recommendations to the securities regulator on rules governing funds and markets where they are material to stability. thankfully, all this is now also being worked on internationally in the financial stability board. a second and obvious policy inference that one could draw from shleifer ’ s paper, and one i want to spend a little more time on this evening, is that it is absolutely vital that ( regulatory ) capital requirements for banks more or less truly capture their risks. two thoughts on that, of rather different kinds. first, it was very obviously a false step when, in basel 2, the international - standard setters tried to follow the techniques and calibrations of private sector risk managers rather than engaging with the externalities that warrant state intervention in this area in the first place. second, more particularly and more concretely, this underlines the vital importance of the current basel work to review fundamentally the capital requirements for banks ’ trading books. in short, basel has recognised that the amount of capital a bank should hold against a liquid trading position often has good reason to be smaller than needed for a hold - to - maturity portfolio, ie where the bank can shed its exposure. but it failed utterly to recognise that since such books are marked - to - market ( or model ) and since the boundary conditions for solvency derive partly from accounting measures of asset values, it is vital that banks hold capital against the risk of violent swings in liquidity premia. yet that is exactly what torpedoed a fair fraction of the largest banks and dealers in the world through their ( levered ) holdings of leveraged loans and super senior tranches of cdos. it was a risk about which bank management, investors, regulators and supervisors were all myopic. the socalled fundamental review of trading book capital requirements is, as adair said, a very important opportunity to correct this. see the bank ’ s paper : “ the role of macroprudential policy : a discussion paper ”, november 2009 and tucker p m w ( 2009e ), “ the debate on financial