, significant in their own right, can cause distortions in monetary policy, render monetary policy tools less effective, and put at risk the integrity of the payments system. in an integrated international financial system, it is increasingly difficult to contain a banking crisis within a country ’ s borders. finally, we must not forget the human consequences of a financial and broader economic crisis, which disproportionately fall on those least able to weather the storm. clearly we need to learn what we can from recent history and take steps now to make domestic and international financial systems more resilient. crises are opportunities for implementing change, and in the us and internationally, significant reforms traditionally have been born of crisis. to effect meaningful and appropriate reform, however, we must fully understand cause and effect and the broader trends of international financial intermediation. today, i would like to share with you my perspective on these issues based on us and international experience, with special emphasis on the need for additional preventive measures. importance of sound banking systems over the long run, a nation must be able to mobilize domestic savings and other sources of funds needed to finance investment and other productive expenditures. this requires the development of an effective banking system that transfers surplus funds of households and businesses to borrowers and investors. fair and impartial allocation of credit accommodates the economic development that results in improved national living standards. notwithstanding broad changes in the intermediation process which have reduced the role of banks in favor of the capital markets, banks retain a critical role in direct intermediation and as managers of financial risk. sound financial institutions, and banks particularly, remain integral to a sound economy. effective financial intermediation is particularly important in the context of most emerging market countries given the relative scarcity of savings, a relatively underbanked population, and large - scale investment needs. the banking sector in emerging market countries also tends to be more concentrated and represents a larger share of the domestic financial system, suggesting that problems there will have an amplified effect on the economy and on the fiscal costs associated with bank rescues. causes of banking system problems banking system crises have many and complex causes, both macro and microeconomic. macroeconomic causes include exogenous shocks, sustained or sharp declines in real growth, accelerating inflation, deterioration in the terms of trade, and changes in the policy regime. macroeconomic shocks also typically expose underlying microeconomic deficiencies in risk management practices and internal controls at financial institutions such as weak underwriting standards,

- term interest rates implied by the curve. it is also why the ecb, like many other central banks, typically accompanies its decisions on ( short - term ) interest rates with communication on how it intends, or expects, to set the latter – and other policy instruments – in the future, as this improves its ability to steer the yield curve and thus attain the desired overall monetary policy stance. therefore, the inflation path in the december staff projections was a clear indication that the financial conditions prevailing before that meeting were inconsistent with a timely return of inflation to our 2 % target. in other words, we needed to act and communicate in order to tighten financial conditions further, including by shifting up the interest rate path expected by markets. thus, we raised our rates by 50 bp and, more importantly, we signalled our intention to continue raising them significantly at a steady pace to reach sufficiently restrictive levels, and to keep them there for some time. indeed, after our december communication, there was an upward shift in the risk - free ( ois ) forward curve. 1 in particular, the day before our february meeting, the 10 - year ois rate was 0. 27 basis points ( pp ) higher than before the december meeting, while the 3 - month ois rate was 0. 51 pp higher. equally important, in real terms the 10 - year ois rate was 0. 51 pp higher than in december, once adjusted for market inflation expectations. and the euro had simultaneously appreciated by 2. 88 % against the dollar in the same period. our february decision represents a continuation ( i. e. “ staying the course ” ) of the policy tightening path that we signalled in december. continuing this path was based both on our updated assessment of the inflation outlook and on the financial conditions prevailing in capital markets at that time. let me address each element in turn. as regards the inflation outlook, at our february meeting we did not have the benefit of a new round of staff macroeconomic projections. but as i said before, our assessment of the inflation outlook is based on a wealth of information, which also includes s urvey - based and market - based indicators. in particular, according to the flash estimate, 2 inflation was slightly lower than expected and stood at 8. 5 % in january, down from 10. 1 % in november. furthermore, the strong fall in gas prices, the easing of global supply chain disruptions, the appreciation of the euro and tighter financing conditions ( the