arbitrarily the activities of financial intermediaries, but rather to ensure that risks that are inherent in all economic activity are sensibly managed and that an adequate cushion of capital is maintained to cover unexpected losses. supervisors therefore have to understand the business of the institutions they supervise, and the opportunities and risks to which they are exposed. this change in focus is placing a premium on new skills within supervisory authorities : the tools of economists, consultants and business managers are taking their place alongside the more traditional disciplines of law and accounting. this has important implications for the recruitment policies of official bodies, to say nothing of compensation practices. good supervision means the need for top - class supervisors. and this is ultimately in the interests of the industry too. my second point has to do with the focus of the oversight activities of the prudential authorities. the job of a regulator should not be to prevent any and all business failures. to attempt to do so would mean that banks would have to conform to excessively costly prudential standards. business would then tend to slip away to unregulated channels of intermediation. the end result would be a distorted competitive structure and a riskier, not a safer, financial system. the task of supervisors, and in particular of central banks, is to ensure the stability of the financial system at large. by that, i mean the capacity of the system to continue to provide intermediary functions to the wider economy. if supervisory oversight were exclusively conducted institution by institution, it would miss some of the most common sources of systemic risk. widespread instability usually arises not from idiosyncratic problems but from shared exposure to common risk factors. the financial cycle is the most common. typically, the upswing of a financial cycle results in an acceleration of credit expansion and rising asset prices. the two feed on each other, since credit expansion causes asset prices to rise, and rising asset prices justify increased lending. eventually, however, something happens to prick the bubble and the process goes into reverse. as asset prices fall, bad loans are revealed. if adequate capital cushions have not been built up, failures occur, and can be system - wide in their incidence. stopping this cycle is not easy. but it is an essential part of the task public authorities now face to build a more robust financial architecture. we will certainly have to encourage financial firms to improve their risk management at an institution level. beyond this, however, thought is called for on how to moderate the credit cycle

into the right parts of that tricky ground, the european monetary union can be preserved as a place of stability that is worth living in. in the first 15 years since the euro was launched, people have enjoyed a stable currency. the average euro - area inflation rate was 2. 0 %, which is very close to the ecb governing council ’ s definition of price stability ( “ below, but close to, 2 % ” ). in the next 30 minutes, i will present my views on which additional piles are required and how they will need to be arranged in order to preserve the european monetary union as a stability union. in doing so, i will first look into what still needs to be done at the country level. from there, i will go on to address the weaknesses in emu ’ s institutional foundation. but before talking about what needs to be done, let us take a step back and consider what went wrong in the first place. bis central bankers ’ speeches 2. the origins of the crisis for many euro - area member states, the introduction of the euro ushered in a new era of abundant capital, due to the elimination of exchange rate risks. and standard economic reasoning suggests that capital should flow from capital - rich to capital - poor economies, where returns should be higher. however, the favourable financing conditions in the euro - area countries with previously higher interest rates mainly stimulated their domestic consumption, thereby raising prices and wages in the non - tradable sector. to put it in a nutshell : inflowing capital was not always put to productive use. overinvestment in real estate as well as public and private consumption failed to raise productivity in some member countries. unit labour costs soared, competitiveness declined. and the rigidity of labour and product markets meant that this process gained even more momentum. when the financial crisis broke out in 2007, the vulnerabilities became apparent : investor sentiment began to shift, and interest rates for the countries in question started to rise sharply, triggering a crisis that is still far from being fully resolved. how could it go so wrong? here is where the euro area ’ s unique institutional set - up comes in. the euro area teams up one common monetary policy with 18 national fiscal and economic policies. this approach reflects a currency area composed of sovereign member states. it grants member states enough room for manoeuvre to preserve their diversity, that is, to establish their own business models or to tailor institutions and policies to their own national