extensively or even exclusively entrusted with banking supervisory tasks. let me be a little more specific about the role and interests of the eurosystem. one could say that the eurosystem plays the role normally reserved for the central bank in countries where it does not have direct responsibility for supervision - such as the bank of england after the creation of the financial services authority. in this context, central banks still maintain a vital interest in a stable banking industry and closely monitor its developments and major systemic risks. this stems from the fact that the banking industry is the key channel for the transmission of monetary policy, the counterpart of monetary policy operations, and the main provider of payment services, which all relate to the basic central banking tasks. therefore, the eurosystem is keen to see its actions complemented by an effective conduct of the supervisory function by the competent supervisory authorities. central banks are keen to be sure that supervision is conducted in such a way as to ensure that banking problems do not jeopardise the conduct of monetary policy. this interest is clearly recognised by the treaty, which assigns to the eurosystem and the ecb some tasks relating to prudential supervision and financial stability. the eurosystem has the duty to “ contribute to the smooth conduct of policies pursued by competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system ”. given the separation between monetary and supervisory jurisdictions, this provision is clearly intended to ensure a smooth interplay between the two. in addition, the ecb must be consulted on any draft community and national legislation in the fields of banking supervision and financial stability, and the ecb can provide, on its own initiative, advice on the scope and implementation of the community legislation in these fields. central banks are normally involved in the process of drawing up legislation relating to, for example, regulatory standards, safety net arrangements and supervision, since this legislation contributes crucially to the attainment of financial stability. moreover, in the event of a financial crisis, the possible provision of emergency liquidity assistance, which is the responsibility of the competent national authorities, may have an effect on the common monetary policy, which is the direct competence of the eurosystem. to limit central bank interventions and the associated moral hazard problems, it is necessary for crisis prevention mechanisms to be in good shape. also for this reason, the eurosystem needs to be assured of effective banking supervision and crisis prevention. in general, the crucial issue is that the risk management systems

in these markets are returning to normal. information from long - term government bond yields may embody a more cautious assessment of the growth outlook, as euro area government bond yields declined over the summer. the ten - year government bond yield in the euro area now stands at 3. 6 %, down from 4. 3 % in june. but the large - scale issuance of long - term government bonds was met by strong demand from the banking sector and institutional investors. altogether, recent financial market developments seem to reflect an increase in risk appetite in an environment of low interest rates and improved liquidity in financial markets. overall, the assessment underlying financial market conditions appears somewhat more optimistic than the consensus forecast for economic recovery. to some extent this is normal, as financial variables tend to anticipate future economic developments. yet, the current low levels of interest rates and the progressive return of risk appetite may push investors to take speculative positions that would be consistent with a more optimistic scenario than the baseline. an interesting question is whether the uncertain prospects for the real economy might be diverging from those for the financial markets, which appear somewhat more optimistic. if this divergence persisted, monetary policy would face a challenge. the underlying stance would appear to be looser, in relative terms, when assessed against the conditions prevailing in financial markets then when compared to real economic developments. this hypothesis seems to be confirmed by the contrasting trends within the banking sector : credit flow to the real economy remains subdued while trading activity has recovered strongly. monetary policy might thus be insufficiently effective in stimulating economic recovery but too effective with respect to risks of asset price bubbles in the financial sector. the challenge for monetary policy how does monetary policy address this potential divergence, in particular in the euro area? we need to start by looking closely at the data. take the pass - through of policy rates to lending rates practised by banks to the end users. evidence shows that lending rates have declined substantially since last autumn, both for households and firms. this has been the result of the cuts in policy rates and the decline in money market spreads, which are now lower than they were just before the bankruptcy of lehman brothers. at the three - month horizon, the spread has declined to about 30 basis points in the euro area. the floating rate on loans to households for house purchase has roughly halved since october last year, and was 2. 8 % in september ( see chart 3 ). overall, the degree of pass - through has been broadly in line with