measuring borrower services produced by a bank. therefore, the appropriate reference rates should be chosen to more closely match the risk characteristics of a bank ’ s loan portfolio. failure to allow for risk will lead to an overstatement of bank output that will distort productivity measures. it is therefore important to consider banks ’ risk when studying their efficiency or productivity and i am pleased to see that several papers on the conference programme address these issues. closely related to banks risk profile is their degree of output diversification, which is likely to increase as specialised financial institutions seek safety in larger and more diversified groups. in principle, diversification lowers risk, but it may also lead to cost savings when jointly producing several outputs. greater output diversification is a likely concomitant of the increase in average bank size that will accompany consolidation in the banking sector. by now, academic research generally recognises that banks must be modelled as multi - output firms, but more work is needed on the measurement of the costs and benefits of joint production. finally, on the priorities for research emerging from the financial turmoil, i would like to leave you with an open question : the bursting of asset price bubbles is likely to lead to a decline in balance sheet values and a fall in productivity. is this a problem of measuring prices or measuring productivity? i realise that this is a very difficult question as even central bankers have a hard time distinguishing bubbles from the fundamental level of prices. however, recent events have focussed our attention on the real consequences of assuming that asset prices are always at equilibrium. if we are going to discuss productivity in financial services, we need some indication of how far our measures will be distorted by asset price bubbles. in conclusion, i am pleased to see you here in luxembourg, where the financial services industry is such an important part of our national economy. it only remains to me to wish you a fruitful discussion and an enjoyable visit to our country.

2011 at the latest represent a minimum requirement for all euro area countries. furthermore, given the future challenges raised by ageing populations, fiscal consolidation efforts should provide a strong focus on expenditure reforms. developing and communicating fiscal exit strategies is an urgent policy priority. 2. 2 financial reform process to mitigate systemic risk beyond the immediate challenges, i wish to focus on the ongoing programme of wideranging financial reform. the objective of this process is to counter systemic risk and enhance the future resilience of the financial system. the recent crisis provided us with three important lessons that could guide this process of financial reform • first, systemic risk needs to be monitored by an operational macro - prudential framework, extending the perimeter of regulation and mitigating the pro - cyclicality of the financial system • second, incentives need to be aligned on creating long - term value and not shortterm profits • third, cooperation in surveillance and oversight needs to be improved let me expand on the first lesson, the need for an operational macro - prudential framework. the analysis and control of systemic risk was a key missing ingredient in the run - up to the crisis. the problem is that although banks may seem resilient when considered individually, the banking system as a whole may still be vulnerable. this paradox can be explained through the two key dimensions of the macro - prudential framework. first, the cross - sectional dimension focuses on the risk of joint failures that reflects similar exposures or interconnectedness. second, the time dimension focuses on interactions within the financial system, as well as feedback between the financial system and the real economy. these links account for the pro - cyclical behaviour of the financial system, which can aggravate systemic risk by amplifying the effects of the business cycle. the basel committee on banking supervision has already agreed on a set of proposals aimed at improving the resilience of the system. these focus on raising the quality and quantity of bank capital in order to better absorb future shocks. they also suggest introducing a bank leverage ratio, although this will have different effects in the us and the eu unless there is convergence in accounting standards. more generally, there is agreement on the need to require banks to build - up countercyclical buffers in good times that can be drawn down during bad times. in addition, the basel committee and the cebs ( committee of european banking supervisors ) are developing new standards for liquidity. the european union has also enhanced its macro - pr