In other cases, there was a change in the relationships between prices and other factors that had been previously observed. The calculated probabilities quite simply did not reflect the reality. It is easy to make a comparison with Swedish humorist Tage Danielsson’s classical sketch about the probability of a nuclear accident: as Harrisburg had just happened, there was absolutely no risk that history would repeat itself. Or to look at it another way, as the complicated financial instruments had previously escaped sudden price falls, one need not expect any sudden price fall in the future. Slightly exaggerated. Underestimating risks and taking excessive risks are two sides of the same coin. And this was just what happened, right up until the US house price bubble burst and the crisis was upon us. It is thus clear that there is a need to ensure that risk management is tightened and that the deficiencies in the banks’ balance sheets are corrected. The Basel Committee therefore requires that the banks assume that many financial instruments – including the derivatives I just mentioned – are much riskier than the banks previously assumed. So under the new regulations the banks must leave a good margin for substantial losses possibly arising when they buy and sell risky instruments. Moreover, the Basel Committee is introducing a new risk measure – a leverage ratio. Behind this term lies a fairly simple measure of risk that is not based on any advanced risk calculation models.
Central bank responses have also tended to adapt themselves to the structure of the respective financial systems, and to the specific dysfunctions and tensions. For instance, the fact that the banking sector plays a predominant role in channelling credit in the euro area economy — compared with the Anglo-Saxon model which is underpinned to a greater extent by the capital market — was from the outset a distinguishing feature in the design of the ECB’s response. Also, set against the strategies deployed by the Federal Reserve or the Bank of England, based principally on “quantitative easing”, the Eurosystem’s response has been more complex over time, adapting itself to the difficulties that have arisen at the  BIS central bankers’ speeches  1  different stages of the euro area crisis, though seeking always to act on the segments of the transmission monetary policy mechanism that were seen to be most impaired. The perception that the interbank market had ceased to operate as an efficient liquidity distribution mechanism between banks meant that the liquidity-provision policy had to become more flexible. And, when the crisis worsened in September 2008, far-reaching changes had to be made to the monetary policy operational framework, to allow the ECB to meet the system’s gross liquidity needs, with a substantial expansion of the size of its balance sheet.