Past and recent events have shown the disruptive power of financial crises. The direct costs of the crises on the financial system – however measured – are high; indirect effects to the entire economic system may be dramatic and long-lasting.

Looking at the experience of the past century, one remains astonished by the recurring tendency of the financial system to accumulate risk and leverage over a number of years, to then suddenly change sentiment and discard risk sharply and indiscriminately. While markets, asset types, players involved and the triggering event differ from one episode to the next, risk accumulation cycles tend to be similar. Crises have also shown that risks and vulnerabilities for the financial system do not stem only from endogenous developments but – probably much more frequently – are the consequence of changes in the macroeconomic and financial environment.

While these recurrences do not make crises more predictable, they have stimulated public authorities to search for ways of reducing the likelihood and impact of crisis events. One of the main lessons drawn from past turbulences is that it is important to complement the supervision of individual institutions with a constant monitoring of conditions of the system as a whole.

Reducing the impact of financial instability entails the development of a comprehensive kit of tools, ranging from forecasting techniques to preventive policy measures, to effective management and resolution devices. The first line is obviously trying to prevent the crisis from breaking out.