Supervisors, for our part, must ensure that the regulatory system encourages banks, securities firms, and insurance companies to be capable of managing their risks today and ready to respond to new challenges tomorrow. Risk management and the supervisory system cannot and should not evolve independently of each other. On the contrary, supervisory agencies and financial services providers are currently working in tandem to develop a “virtuous circle” in risk management and supervision. Together, we want to ensure that supervision reflects the best practices being developed by the industry, while at the same encouraging institutions to improve those practices constantly. This morning, I would like to share a financial supervisor’s perspective with you on the “virtuous circle” that is emerging to encompass risk management and supervision. I’ll begin my remarks with the results of a study that outlines the great advances achieved by leading financial institutions around the world in developing more rigorous and comprehensive risk management approaches. At the same time that commercial organisations made improvements to their internal processes, supervisors have sought to incorporate those improvements into the supervisory structure, which is my second topic. We are moving toward a more flexible and forward-looking approach to financial supervision that seeks to motivate prudent management - and thereby complete the “virtuous circle” by encouraging further advances in risk management. The reforms underway are especially evident in the banking world under the Basel Committee’s “Basel II” framework.

The TPI will be an addition to our toolkit and can be activated to counter any unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area. By safeguarding the transmission mechanism, the TPI will allow the Governing Council to more effectively deliver on its price stability mandate. Subject to fulfilling established criteria, the Eurosystem will be able to make secondary market purchases of securities issued in jurisdictions experiencing a deterioration in financing conditions not warranted by economic fundamentals, to counter – to the extent necessary – risks to the monetary policy transmission mechanism. The scale of TPI purchases will depend on the severity of the risks facing monetary policy transmission. Purchases are not restricted ex ante. The main characteristics of the TPI are as follows: Purchase parameters. Purchases will be focused on public sector securities with a remaining maturity of between one and ten years. Purchases of private sector securities could be considered, if appropriate. Eligibility. The Governing Council will consider a cumulative list of criteria to assess whether the jurisdictions in which the Eurosystem may conduct purchases under the TPI pursue sound and sustainable fiscal and macroeconomic policies. In particular, the criteria include: (1) compliance with the EU fiscal framework; (2) the absence of severe macroeconomic imbalances; (3) having a sustainable public debt trajectory; and (4) compliance with the commitments contained in the recovery and resilience plans and with the country-specific recommendations in the fiscal sphere under the European Semester. Activation.