SPEECH  Towards a stronger non-bank financial sector Speech by Luis de Guindos, Vice-President of the ECB, at the Association for Financial Markets in Europe (AFME) and Official Monetary and Financial Institutions Forum (OMFIF) 3rd Annual European Financial Integration Conference Frankfurt am Main, 23 May 2023 In recent years, the global economy has been hit by a series of unprecedented shocks – including a pandemic, the outbreak of war, and an energy crisis. And with geopolitical tensions on the rise, we may see the frequency of such shocks even increase. The prospect of an increasingly shock-prone economy means that it has never been more important to ensure the financial sector is resilient to challenges that come its way. And today, I would like to share some thoughts on financial integration in the euro area, focusing on the important role of the non-bank financial sector in the euro area financial system. The importance of the financial system for the economy A strong and integrated financial system is essential to support the growth and resilience of the euro area real economy. Well-developed and broad capital markets can help to efficiently allocate capital to the most innovative and productive companies, thereby contributing to economic growth. Market-based finance also allows companies to diversify their funding sources and facilitates increased cross-border funding. This can result in greater risk-sharing across the euro area and contribute to overall financial resilience. Investment funds, for instance, play an important role in financial integration.

Chart 7: Central bank capital replenishment tools  13  The costs and benefits of these arrangements are quite subtle, and rest heavily on the extent to which the markets and wider public perceive the Bank to have the means to deliver its substantially expanded remit effectively without recourse to money creation, both in today’s market conditions and in stressed 14  conditions . Comprehensive stress testing, together with the other elements of the forward-looking toolkit 12  This capital figure consists of ‘Capital and Retained Earnings’. It does not include ‘Other Reserves’ of £ which are included in accounting capital, but not considered loss-absorbing for regulatory purposes. For more details see http://www.bankofengland.co.uk/publications/Documents/annualreport/2016/boereport.pdf . 13 Taken from BIS Papers No.71 (see footnote 1). 14 These issues are also discussed in the IMF’s most recent UK Financial Sector Assessment Program review: see Box 1 on p.12 of https://www.imf.org/external/pubs/ft/scr/2016/cr16159.pdf. 12  All speeches are available online at www.bankofengland.co.uk/speeches  12  developed by the Bank’s new second line function, have improved our ability to assess the adequacy of these arrangements considerably. (iv)  Risk tolerance, limits and thresholds  Board-level risk tolerance statements, and the specific trading and lending limits associated with them, are amongst the risk manager’s most powerful tools. But the calibration of both is an art as much as a science, reflecting the difficulty of defining precise tolerance measures, and (in commercial banks) the inevitable tension between revenue-generation and risk- or capital-reduction goals.