. the crisis has also revealed two major lessons for our supervisory framework. the first is that macro - prudential factors should play a much larger role in the approach followed by supervisors. the second is that a common banking supervisor is essential for an efficient monetary union. turning to the first, and again looking back at the pre - crisis period, banking supervision was essentially “ micro - based ”. it mostly focused on ensuring the safety and soundness of individual institutions, while taking the rest of the financial system as a given. the implicit assumption was that stable individual institutions would automatically ensure a stable system. this micro - based supervisory approach was likely to underestimate the systemic component and was not able to internalise and target the negative externalities that could have built up as a result of increased risks for the system as a whole. the lending booms we experienced in some euro area countries before the crisis are a good illustration of the problems arising from an excessive reliance on this micro - prudential approach. during the upswing, banks reported high levels of profitability and low levels of measured risk. both of these factors tend to improve capital ratios, offering a reassuring picture of the solvency of individual banks from a micro - supervisory perspective. yet historical experience shows that rapid credit growth usually comes at the cost of increasing the systemic – or tail – risks, for instance, by lowering lending standards via undiversified housing exposures or excessive reliance on short - term market funding. again, the crisis raised awareness both of the endogenous nature of many systemic episodes of financial instability and of their negative externalities that could be of great importance in determining macroeconomic outcomes. from a policy perspective, the new focus has led to an increased interest in the macro - prudential approach to bank regulation and supervision. in europe, the new regulatory and supervisory infrastructure about to be adopted will provide supervisors with macroprudential tools. 2 european economies face different economic and financial cycles and different types of systemic risk, and their financial sectors still exhibit different structural features. the ecb therefore considers it important that authorities can apply stricter macro - prudential requirements at national level. 3 examples are the counter - cyclical buffer or the possibility for national authorities to adjust risk weights or set stricter criteria, e. g. loan - to - value ratio, for exposures secured on residential or commercial real estate. european central bank : opinion on a proposal for a directive on the access to the activity of credit

oriented monetary policy. in the course of 1999, inflation for the euro area remained at a rate consistent with price stability of around 1 %. the eurosystem is determined to conduct the appropriate policy in order to ensure that price stability remains in place. let me also mention that, as expected, the transition of the euro area financial markets to the year 2000 went smoothly. this reflects the careful preparation of the banking and financial community and the comprehensive and flexible operational framework of the eurosystem. the establishment of monetary union marks an outstanding historical achievement. in my remarks i should like to summarise the main features of the eurosystem ’ s monetary policy strategy and the experience gained with the euro in this first year. by subsequently addressing forthcoming challenges, i should then like to span the bridge towards the future. a clear and transparent monetary policy strategy let me describe our first experience with the monetary policy strategy in the euro area. the eurosystem has chosen a clear and transparent monetary policy strategy with a quantitative definition of its primary objective of price stability. the chosen stability - oriented monetary policy strategy is forward - looking and medium - term oriented. the eurosystem has a policy framework which truly reflects the complexity of the economy. it is sufficiently flexible to allow for appropriate responses to specific shocks. it also allows account to be taken of the possibility of regime shifts that could impact on the stability of important economic relationships in the course of time. let me briefly recall the main elements of the eurosystem ’ s strategy. a clear definition for the primary objective to maintain price stability in the euro area contributes to stabilising market expectations. price stability is defined as an annual increase in the harmonised index of consumer prices ( hicp ) for the euro area of below 2 %. the eurosystem aims to maintain price stability in line with this definition over the medium term. in order to achieve its overriding objective, the governing council has adopted a two - pillar approach. the first pillar assigns a prominent role to money. by announcing a reference value for the growth rate of a broad monetary aggregate, the strategy takes into account that inflation is a monetary phenomenon in the medium term. the reference value exploits the leading indicator properties of the broad aggregate m3, which according to most empirical studies is the most useful guidepost for future price developments in the euro area. the first reference value was set in late 1998 at an annual growth rate for m3 of 4½ %. following a review of the reference value in december