The financial system is in a crisis as a result of excessive risks taken, Quaden said at a parliamentary hearing in Brussels, Belgium on Tuesday, adding that the interest rate remained too low for too long in the U.S. The central banker also said that securitization has contributed to the spreading of the crisis.

In addition, Quaden said tensions in the money markets are still high despite massive liquidity injections, and noted that confidence in the interbank sector is nearly gone.

The central banker told Parliament that he had not anticipated the severity of the crisis and stressed the need for European financial regulation. Quaden also said the Belgian Central Bank and Belgium's Banking, Finance and Insurance Commission (CBFA) need to co-operate more closely with one another.

The ECB member, also Governor of the National Bank of Belgium, called the Lehman Brothers and Washington Mutual developments "terrible." Quaden said the government-backed rescue attempt of Fortis Bank is the most significant case on record, and revealed that the bailout plan was put together in a matter of hours when the bank's situation became apparent on Sept. 26.

The collapse of Fortis Bank would have been a great risk to the financial system, Quaden said, explaining why ECB President Jean-Claude Trichet had been asked to join the Fortis talks in Brussels.

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