, as noted above, monetary policy is largely transmitted through financial market operations. hence, the effect that monetary policy has on the real economy depends crucially on the smooth functioning of financial intermediaries and financial markets. it is at this point that financial stability analysis and monetary policy analysis are most closely interlinked. second and more generally, major macroeconomic objectives, especially price stability and sustainable output growth, are jeopardised if the financial system suffers from instability. this is underlined by the generally high macroeconomic costs of financial crises. in addition, this aspect has gained importance since financial turbulences seem to have become more frequent in past decades owing to accelerated growth in financial transactions and the greater complexity of new financial instruments. third, financial stability is closely linked to a central bank ’ s interest in the prudent design and management of the payment and settlement systems which process its currency. the eurosystem, for instance, has the statutory task of promoting the smooth operation of payment and settlement systems. against this background, referring to financial stability analysis as a new trend among central bankers would be something of a misnomer. indeed, financial stability analysis is anything but a passing fashion. it has, in fact, been a field of research of its own right since the mid1990s. this is reflected in the wide dissemination of financial stability reports, which are now produced in more than 50 countries worldwide. nonetheless, it is fair to say that financial stability analysis is still, to a large extent, work in progress. to illustrate my point, let me outline briefly the kind of challenges central banks face. to begin with, financial stability is not easily measured. this is hardly surprising as, in contrast to monetary policy analysis, there is no single indicator ( such as inflation ) to observe. similarly, initiatives to create some sort of an all - encompassing financial stability index have failed to convince so far. instead, the concept of financial stability involves various financial intermediaries, financial market segments and infrastructure, for which a whole host of different quantitative and qualitative indicators exist. as a consequence, determining the degree of financial stability remains a highly complex task. at this point, the natural suggestion from an academic outsider would be to construct a theoretical model. such a simplified representation of reality would help the academic to single out the most relevant indicators and to define the interrelationships between financial market and economic variables. however, model - based financial stability analysis is still in its infancy. three

whose currency area coincided with the boundaries of its financial markets, i could end my speech here with a brief summary. however, as governor of a central bank that is an integral part of the eurosystem, there is yet another topic to cover : financial integration. it is generally accepted that, in a currency union, well - integrated financial markets facilitate the implementation of the single monetary policy. there are three aspects worth mentioning. first, a currency union should work more smoothly, the more integrated the national financial markets are. indeed, financial integration can help individual emu member states to absorb country - specific shocks more easily. the reason for this is that the more diversified the sources of national income and the easier it is to borrow abroad, the less consumption and investment need to follow fluctuations in national output. hence, national consumption and investment levels can be insulated from domestic macroeconomic shocks via cross - border risk sharing. second, financial integration strengthens the stability of the euro area financial system – and of the macro economy in general. basically, in a well - integrated financial system, risks tend to be more diversified on a cross - border scale which should lead to financial intermediaries, markets and infrastructure becoming more resilient to idiosyncratic shocks. having said that, integrated financial markets arguably broaden the scope for spillover effects across borders – as manifested by the recent us subprime crisis. third, i have already stated that the eurosystem ’ s tasks include the smooth operation of payment and settlement systems – which is closely linked to the progress of financial integration. there is an abundance of evidence that the launch of the euro was a major catalyst for financial integration in the euro area. in general, financial integration is most advanced in those market segments which are the closest to the single monetary policy. this is particularly visible in the unsecured money market, which was almost perfectly integrated right at the start of emu, as measured by the low cross - country standard deviation of the average overnight lending rates among euro area countries. moreover, the euro has significantly reduced home bias in the euro area bond and equity markets, albeit to varying degrees. principally, financial integration has progressed most in government bond markets and is least advanced in equity markets. having said that, the percentage of cross - border holdings of bonds and equities in the euro area has grown over the past ten years. in addition, bond market yields and share prices are increasingly being driven by common euro area factors, although