aptly put it. the structural reforms we need now are the ones that unleash innovation and propel productivity. we also need them now because these are the reforms that can credibly raise expectations of a higher income in the future. and if income is expected to be higher tomorrow, investments will be made today. reforms that increase supply will thus support demand as well. in some areas in need of reform, it is the european commission who is in the driver ’ s seat. other areas, such as labour markets, remain a national prerogative. but even with initiatives on the european level, national governments are on board via the european council. political science teaches us that it can be an effective strategy in international negotiations to proclaim that your hands are tied because of domestic politics and it is either your way or the highway. but if everybody takes this “ logic of two level games ”, as the american scholar robert putnam2 has called it, to the extreme, nothing will get done. in the interest of a more prosperous monetary union, at times national sensitivities have to be put aside. which actions are required to brighten the euro area ’ s growth prospects? i see three areas in particular where action is needed : the financial markets, product market regulation and the labour markets. financial sector reforms for growth let me start with how financial markets can channel capital into innovative companies more efficiently. europe ’ s biggest reform project, the banking union, is first and foremost a project about financial stability. but it is important to also see its potential ramifications for growth. by lifting putnam, robert ( 1988 ). “ diplomacy and domestic politics : the logic of two - level games ”. international organization 42 : 427 – 460. bis central bankers ’ speeches the veil of uncertainty surrounding banks ’ balance sheets, the comprehensive assessment has helped to make the banking sector more stable. and i am quite confident that, prospectively, this will improve banks ’ ability and willingness to finance the real economy. additionally, a functioning bank resolution regime with a credible bail - in of shareholders and creditors strengthens incentives for banks to carefully select and monitor the firms they lend money to. this ensures that capital will be put to its most effective use. and studies3 show that this is good not only for financial stability but also for growth. the evergreening of loans to non - viable firms is not a recipe to reinvigorate growth – this is the lesson of the japanese experience in the

, so far, the turmoil has been largely in the investment banks : bear stearns, lehman bros, and merrill lynch ; with some ripples in goldman sachs and morgan stanley. our us bond holdings have benefitted from the increase in prices consequent on the flight to quality, which has been the main reaction to the market meltdown. our limited exposure to fannie mae and freddie mac bonds ( some 6 per cent of our total reserves ) could have resulted in some losses. however, the us government take - over of these institutions has reduced, if not eliminated, the risk of this exposure. lehman bros, as one of our external managers managed about 6 per cent of the total portfolio. the bulk of these resources was invested in treasury securities of g7 countries, and as such faced very low risk. a very small amount ( us $ 85 million ) was invested in a mutual fund sponsored directly by lehman bros. we were able to liquidate this asset at no loss. the bulk of our asset - backed securities were issued by merrill lynch. the take - over of this institution by the bank of america eliminates or reduces the risk attached to this asset. but ladies and gentlemen, if we had any doubts, the current turmoil in international financial markets should remind us that no institution is totally immune from possible contagion, regardless of what the rating agencies may say. as you may know, not too long before bear stearns was declared insolvent it was rated bbb ; lehman bros was rated ( a + ) and merrill lynch ( a + ) : they were all considered investment grade. before selecting lehman bros as an external manager, we went through a rigorous selection process that not only included examination of past performance of funds managed and lehman ’ s ability to deliver superior returns, we also conducted a thorough examination of lehman ’ s financials. but as happened many years ago, with the dot - com crash, investor sentiment can change very quickly and sharp declines in stock prices can quickly erode the capital of even the strongest banks, producing the dire consequences that have attended three of the world ’ s five largest investment banks. since lehman ’ s and merrill lynch ’ s difficulties, the bank has carefully reexamined the financial status of all our counterparties as well as our investment managers to ensure that none of these are on any watch - list. we have also taken the decision to introduce two new elements to our investment strategy. first, until financial markets have been stabilized, mat