While the ratio of financial sector liabilities to GDP has broadly stabilised, euro area large and complex banking groups have steadily increased the median core Tier 1 ratio from 8.3% in 2009 to above 11% in 2013.7 To strengthen their capital position banks have issued equity, converted hybrids, received capital injections and raised the levels of retained earnings. The stronger capital positions also mean that the relative share of debt in financing is reduced and substituted by more equity, which should provide a better buffer against economic shocks. After all, debt is a relatively inflexible form of financing as it requires repayments on time and in full. But the stronger capital positions have also meant that banks have been shedding assets, a process which depresses credit growth and puts a drag on the economy. In addition, as households and non-financial corporations also reduce their indebtedness, they are demanding less financing from banks. Taken together, we can expect that bloated balance sheets will contract further. It is important that this deleveraging process occurs in an orderly manner by balancing the adjustment of assets and liabilities. Most of all, unnecessary fire sales generating detrimental falls in asset prices and credit rationing for productive investments need to be avoided. Throughout the crisis, the ECB has demonstrated its ability to actively mitigate these effects by ensuring abundant funding to the banking sector through its liquidity operations.

At the same time, repairing banks’ balance sheets and ensuring their soundness is a pre-condition for re-establishing adequate financing of the economy. This is why the SSM, including the comprehensive assessment, and the single resolution mechanism are crucial steps towards improving euro area governance. The European institutional context may sometimes appear cumbersome, but the progress made shows that Europe recognises problems and responds to them. Nevertheless, even with these changes, solving a stock problem means addressing a prolonged adjustment in flows in the future. We are all well aware that debt consolidation alone weighs on economic activity just like a diet leaves one with the feeling of fatigue. The deleveraging process will require time; we should not lose patience in the process. Compared with past episodes, deleveraging has, in fact, become even more challenging. The global dimension of deleveraging makes burden-shifting across countries impossible and today’s demographic trends are putting strain on our growth prospects. It is therefore crucial to balance the consolidation across generations12. Nonetheless, I reemphasise the need to complement the consolidation process with structural changes in order to make our economies fitter. This involves reducing red tape to ease business creation, streamlining governance of state-owned enterprises and reallocating workers more flexibly from stagnating and declining industries to productive and expanding ones. Structural reforms are not only required in the countries in the euro area, but have also been recognised by Prime Minister Abe in his third arrow as essential to securing the Japanese recovery over the long term. Thank you for your attention.