The ECB and the entire European System of Central Banks stand ready to assume the macro-prudential supervision tasks envisaged in the report by the de Larosière Group and to provide the necessary analytical and logistical support to the Systemic Risk Council. For the new Council to function effectively, three key requirements will need to be fulfilled: First, in order to identify and assess the risks and vulnerabilities in the EU financial system as a whole, to issue risk warnings and to adopt related macro-prudential policy recommendations, the Systemic Risk Council will need to have an information base that draws on both macroand micro-prudential supervisory information. This will allow the use of all relevant information for assessing, among other things, the “interconnectedness” of financial institutions and markets and its implications for financial system stability. Close cooperation and well-functioning information-sharing mechanisms between the new Council, microprudential supervisors and the proposed European System of Financial Supervision will therefore be indispensible. Second, adequate institutional mechanisms need to be in place to ensure that the risk warnings and the related recommendations issued by the Systemic Risk Council are translated into effective action. The days when risk warnings were issued and very few listened – or wanted to listen – should be over! Third, for the Systemic Risk Council to be effective, legitimate and independent in its decision-making, a solid legal basis is  4  BIS Review 49/2009  essential.
On the contrary, they should assert their ascendancy over it through strict financial management. 2. Finance should not dominate the economy, it should serve it. i)  Reasserting the importance of regulation and supervision:  BIS central bankers’ speeches  1  •  The period from the 1990s to the start of the 2000s is sometimes called “The Great Moderation” because inflation remained stable at moderate levels and growth appeared solid and sustainable. In reality, however, the period saw frequent buildups of financial excesses. These excesses led to the crisis, and they were firmly rooted in the dogma of self-regulation – a dogma which was itself fostered by the belief that financial markets were somehow sacred and inherently “efficient”, capable of setting “real” prices. •  The crisis completely discredited this theory. From the first sparks of turmoil, the lack of transparency in certain segments of the market – notably CDOs – significantly exacerbated the loss of confidence. Financial institutions had insufficient capital cushions to absorb the shocks, leading to bankruptcies and forcing the government to bail them out, a process that was extremely costly for public finances, but also very damaging to financial sector accountability, as at times it meant bank losses were “socialised” whereas previously their profits had been “privatised”. This is the problem of moral hazard, a subject which will no doubt come up over the course of this session.