If things go really wrong, the result may be a financial bubble that – just like any bubble – sooner or later bursts, with dramatic consequences. Those with practical experience of financial markets will readily find themselves at home in this new theoretical and empirical analysis. In the 1990s there were a number of bubble-like developments where prices ceased to mirror fundamental values. The one that comes to mind first is perhaps the IT 7  See De Bondt, W.F.M. & Thaler, R. (1985), Does the stock market overreact?, J. of Finance 40, pp. 793–805; also Jegadeesh, N. & Titman, S. (1993), Returns to buying winners and selling loosers: implications for stock market efficiency, ibid. 48, pp. 65–91. 8  Cutler, D. Poterba,J. & Summers, L. (1991), Speculative dynamics, Review of Economic Studies 58, pp. 520–546. 9  See e.g. Tversky, A. & Kahneman, D. (1974), Judgement under uncertainty: heuristics and biases, Science 185, pp. 1124– 1131. 10  Shiller, R. (2000), Irrational Exuberance, Princeton University Press, New Jersey. 11  Janis, I.L. (1982), Groupthink (2nd ed. ), Houghton Mifflin Co., Boston. 12  Babad, E. (1987), Wishful thinking and objectivity among sport fans, Social Behavior: An International J. of Applied Social Psychology 4, pp. 231–240. 4  BIS Review 5/2001  bubble.
I trust this regulation will be approved shortly, in accordance with the objectives set by the new European Commission, and that this taxonomy will finally provide us with a common definition of what may be considered “environmental” or “sustainable”. The role of supervisors – external initiatives As supervisors, we clearly have responsibility for urging on these changes. We need to be proactive; in particular, we need to enter into a dialogue with banks to analyse how they are incorporating environmental risk. At the Banco de España we are intent on pressing ahead with this dialogue. Let me mention just a few examples of recent steps taken. To assess the level of preparation for environmental risk, we conducted a survey among the 12 banks directly supervised by the SSM and several other smaller banks. Subsequently we discussed the survey findings with the participating banks, conveying to them the importance of this issue and the supervisory expectations. According to the survey findings, many banks that were already explicitly considering environmental risk have included it in their social responsibility areas. Almost all have a team dedicated exclusively to Sustainable Finance and some also indicate that they have established specific committees, reporting in some cases to the Area General Manager or Corporate Secretary and in others directly to the Board of Directors. 4  In general, the Green Bond Principles are updated once a year, to reflect the latest market developments.