instruments were, as i said, monetary policy and a weak rule, the old stability and growth pact. with the reforms already decided or at an advanced stage of discussion, the eu and the eurozone have adopted instruments for intervention in three important areas : banking and financial supervision, economic and budgetary policy coordination, and crisis management mechanisms and procedures. the first two reforms should improve the ability of the eu to prevent the build - up of unsustainable financial imbalances, and hence the emergence of crisis situations. the third reform will enable crises bis central bankers ’ speeches to be managed in an orderly manner by facilitating the adjustment of disequilibria. let us briefly see what is involved. the reform of the supervisory architecture. three new independent authorities have been instituted, responsible for the microprudential supervision respectively of banking, insurance and the financial markets. they began operating on 1 january of this year. their main task is to make the supervisory rules uniform in the respective sectors and to harmonize the supervisory practices of the national authorities, for the coordinated pursuit of their objectives of intermediaries ’ stability, capital adequacy and liquidity. specifically, the european banking authority will also be charged with preparing and conducting a new stress - test of european banks after the exercise conducted last july, which was severely criticized by analysts and market participants for its leniency and lack of transparency. it is absolutely essential that the new test adhere to internationally accepted standards and methods, and that markets be promptly informed of the results ; and it is necessary that any bank that fails to pass take adequate measures to strengthen its capital. alongside the microprudential supervisory authorities, a macroprudential supervisory body will operate at the ecb to monitor systemic risk. the european systemic risk board will analyse the evolution of the credit and financial aggregates to determine whether unsustainable imbalances with systemic implications are being created. the board will be empowered to recommend to the competent authorities that they take the measures necessary to prevent “ speculative bubbles ” in the financial and property markets. economic policy coordination. the changes in this area, designed by the task force under president van rompuy, envisage a significant strengthening of budget discipline through a reform of the stability and growth pact and a new mechanism of surveillance on macroeconomic disequilibria and vulnerabilities. the new stability pact will stress mediumterm fiscal sustainability and trends in the public debt, imparting operational and

after 2004 ( chart 3 ). european financial institutions expanded their claims not only to borrowers within europe, including those in their own countries, but also to those outside the region. for example, spain increased its claims on latin american countries and france expanded those on the united states. according to the bis international consolidated banking statistics compiled by the bank for international settlements, european financial institutions, which traditionally had a major presence in cross - border claims, continued to boost volume and market share, especially after 2004 ( chart 4 ). a look at the statistics by country for non - eurozone assets shows that both spain and france experienced remarkable increases after 2004 ( chart 5 ). even germany showed a noticeable increase. 2. 2. 2004 : inflection point of the cross - atlantic financial markets looking back at the history of european financial institutions ’ risk taking behavior, the widespread acceleration around 2004 is remarkable. there seem to be no particular events or regulatory changes in the eurozone that can fully explain this acceleration. so, what happened in 2004? in fact, 2004 is the inflection point of the u. s. financial markets as well. the size of u. s. investment banks ’ balance sheets ballooned after 2004 ( chart 6 ). likewise, the balance sheets of special purpose vehicles ( spvs ), which are off the balance of, but virtually supported by their “ parent ” commercial banks, accelerated sharply to a degree that exceeded even those of the investment banks. spvs increased their assets, including investment in securitized products, against a backdrop of favorable funding conditions, which i explain shortly. the massive expansion of the balance sheets of spvs together with the “ activism ” of investment banks contributed significantly to the astonishing growth in the size of this so - called shadow banking system. one factor that explains this remarkable increase in risk taking activity is the seemingly benign financial conditions of the “ great moderation ” at that time. massive capital inflows from emerging economies contributed to lowering interest rates in the united states during the period. 2 after joining the wto in 2001, china expanded its current account surplus, playing an increasingly important role in financing the u. s. current account deficit. a large portion of securities investment from china went to u. s. treasuries and agency debt markets ( chart 7 ), 3 contributing to the decline not only in interest rates but also in their volatility ( chart 8 ). the sustained volatility decline after 2004 was remarkable,