Final remarks While the ESRB has a better chance of achieving its mandate now than it would have had earlier this decade, its tasks will be difficult and its challenges considerable. In particular regarding the issuance of risk warnings, the credibility of the ESRB will rest upon the minimisation and balancing of so-called type I errors and type II errors. Type I errors entail the possibility of identifying those risks that subsequently do not materialise, while type II errors relate to the possibility of failing to identify risks that subsequently do materialise. Identifying a long list of potential systemic risks to financial stability could minimise the  BIS Review 115/2009  11  probability of making type II errors but may lead to accusations of “crying wolf”. The opposite could lead to an important risk to the EU financial system being overlooked, which if it materialised, could harm the ESRB’s reputation. Both the rigour of the checks for potential sources of risk and vulnerability, and the quality of the risk assessments (based on the information made available to the ESRB) should have a substantive influence on the credibility and effectiveness of the Board’s work. Addressing the type I-type II error trade-off by selecting which risks merit risk warnings can only be done by combining a comprehensive and strict monitoring of all potential sources of risk with a well-informed and detailed risk assessment.
The crisis has also shown that firm-level data on financial intermediaries, including of a supervisory nature, might be critical to identify institutions of potential systemic relevance that warrant closer monitoring and to understand interdependencies among firms and markets – interdependencies which, if impaired, could have a strong impact on the overall stability of the financial system. The key data requirements relate to: i) the possibility of joint failures of institutions resulting from their common exposures at a single point in time (these exposures could derive from shocks that come from outside the financial system or inter-linkages among intermediaries), and ii) the fact that, over time, the dynamics of the financial system and of the real economy reinforce each other, increasing the amplitude of booms and busts, and undermining stability in both the financial sector and the real economy. The financial crisis has shown that monitoring aggregate data is insufficient and may not accurately indicate the vulnerabilities hidden in the financial system and that there is the need to link micro data to macroeconomic risks. As such, firm-level data (as opposed to, for example, estimates based on country or sector aggregates) have been recognised as essential for more accurate assessments of the potential impact of risks materialising, e.g. estimating the amount of losses for the financial  10  BIS Review 115/2009  sector, as well as for conducting system-wide stress testing, contagion analysis, or the assessment of feedback loops between the real and financial sectors.