A much more important issue with respect to policy normalization is moderating the risk of a sharp snapback in longer-term yields. But this has less to do with the size of the balance sheet specifically than the challenge of normalizing the current stance of monetary policy in all its dimensions. There is always a risk that market participants will foreshorten the Fed’s actions. Market participants could collapse an extended sequence of steps back to the date of the first move towards normalization resulting in an abrupt tightening of financial conditions. The move to economic thresholds-based guidance for the fed funds rate should help in this regard. While the thresholds are certainly not triggers, they should help market participants adjust expectations about the likely timing of liftoff in a relatively continuous manner and guard against these expectations being pulled further forward in time than is warranted by changes in the economic outlook. Nevertheless, we will need to communicate our broader intentions very clearly. Even when purchases cease, the enlarged balance sheet will provide substantial ongoing stimulus. It is important to recognize that the Fed could remain in this posture with policy “on hold” for a significant period. As the threshold framework should make clear, there is no fixed timeframe between completing purchases and raising short term rates. Long-term yields rose sharply in 1994 and 2004 when economic recoveries got underway in earnest after sustained periods of unusually low short-term rates.

Supervisors both at national and European levels have encouraged and monitored the implementation of contingency plans. Up until now, most major players have taken the necessary steps, but some concerns linger regarding the preparedness level of the smaller players, particularly electronic money and payment institutions. On the other hand, public measures have been taken to deal with the specific risks of a no-deal Brexit that could threaten financial stability or consumer protection. The temporary and conditional recognition of British CCPs should prevent cliff-edge effects, as well as temporary waivers on mandatory clearing and bilateral margin exchange for a limited category of products. Member states have also adapted their domestic regulations or are planning to do so. In France, legislation has been enacted ensuring contract continuity for cross border activities and an extended access to UK settlement systems. II. Building a financial Eurosystem Let me now turn to the heart of my topic. The unfortunate reality is that Brexit leaves us no other choice: we must now reshape the European financial system and develop its autonomy. The euro area can already build on strong assets: an effective monetary Eurosystem, the legal framework for a single financial market and essential components of a Banking Union. However we do not, as yet, have a “financial Eurosystem”, made up of stronger pan-European financial institutions and market infrastructure. Let’s be clear: there will not be a single City for the continent, but rather an integrated polycentric network of financial centres, with specialisations based on areas of expertise.