The sources of systemic risk that may originate from the interplay between the financial sector and real economy imply that safeguarding financial stability is essential for ensuring fiscal sustainability and co-ordinating economic policies, and also in the context of any potential financial assistance by the ESM. Accordingly, it is essential in my view to also enhance the supervisory framework within the euro area. This could be achieved through several institutional steps. One possibility would be to grant the EBA specific powers for the euro area, including wider possibilities to take mandatory decisions in certain fields addressed to national supervisors and financial institutions. Nevertheless, it is worth remembering that in 12 out of the 17 members of the euro area, the respective Central Banks have full responsibilities in banking supervision. After the crisis, the trend in several countries has been to change the system of banking supervision by giving that responsibility to the respective Central Banks. Regarding macro-prudential policies the Eurosystem (the ECB plus the National Central Banks) was already given a special role in supporting the mission of the European Systemic Risk Board. All this opens the opportunity to an alternative future development in the direction of giving a more significant role to the Eurosystem in the supervision of banks, in particular of large cross-border banking groups An enhancement of the role of the Eurosystem would not need to represent a major overhaul of the institutional setting.

These two findings militate in favour of a more comprehensive policy framework for governing financial stability in Europe, which should comprise in my view the following. First, the full implementation of the economic governance reform, which is presently under discussion. It is unquestionable that a sound and credible framework of economic governance is fundamental for financial stability, as, for example, public debt developments have demonstrated. Second, a strengthening of financial supervision in the euro area. This should be understood as an essential component for the overall effectiveness economic governance alongside the strengthening of the fiscal pillar, the surveillance of macro-economic imbalances, co-ordination of economic policies, and the European Stability Mechanism. I will organise my remarks today as follows. I will begin by examining how the crisis unveiled the shortcomings of economic governance in what regards in particular the channels through which financial instability can propagate in the euro area. I will then propose what should be, in my view, the five key components of financial stability governance, highlighting in particular the necessary euro area dimension of such governance. Economic governance and financial stability The crisis provided some important lessons for economic governance in the euro area – lessons that were not fully understood at the inception of EMU. BIS central bankers’ speeches  1  The first lesson refers to the sources of financial instability in the euro area. Euro area economic governance had been constructed primarily to prevent negative spillovers via the public finance unbalances and we learned that this was not enough.