but also for us supervisors and regulators. this brings us to a topic that has been making more and more headlines in the past few months : the european banking union. let us look ahead to the next 12 months. what is on the agenda? the legal basis for the new european single supervisory mechanism, or ssm for short, has just been created. it is now time for its implementation. we will regulate cooperation between the ecb and the national competent authorities within a set framework and press ahead with our work on the new joint supervisory approach. we will also assemble teams of supervisors from the ecb and the national supervisory authorities and prepare them to take on supervisory functions. the greatest challenge in the coming months will be the comprehensive assessment. the first step of the comprehensive assessment has already been launched. supervisors have begun selecting the particularly critical balance sheet items of the 128 banks affected. the assets contained in the items will then be subjected to closer scrutiny. for instance, the recoverable value of the posted collateral and the valuation of illiquid assets will be assessed. the ecb will conduct a quality assurance check together with the national competent authorities at all stages of the assessment in order to ensure the comparability and robustness of the results. this appraisal of the present situation will be augmented by a bis central bankers ’ speeches joint ecb and european banking authority ( eba ) stress test which is designed to expose potential future risk as well. the balance sheet assessment will be a true “ acid test ” – for the banks as well as for the ecb and the national competent authorities alike. the comprehensive assessment is likely to cause some unease since the ecb will hardly be able to meet the market ’ s sometimes unrealistic expectations. for example, it will not be possible to assign a specific euro amount to capital needs until the entire process – that is, bsa and stress test – has been completed. the comprehensive assessment also represents a major opportunity, however. a thorough balance sheet cleansing can free banks of legacy problems and enhance the functional viability and stability of the european banking sector. what is important is that, at the national level, provisions should be made to cover potential capital needs. the ecb will additionally benefit from having a precise insight into the risk situations of those banks which will be under its supervision in future. i see the bsa as an opportunity – for supervisors and banks alike. the single supervisory mechanism ( ssm ) is the furthest - advanced element of the

contemplation for fiscal responsibility at the centre and several states. financial intermediaries, especially banks, take exposures with a great degree of comfort when there is a sovereign guarantee. such guarantees are often formally extended and notified as such to the legislative bodies and financial markets. rbi has encouraged governments to pass a legislation prescribing a ceiling on such guarantees and also charge a fee without exception to ensure credibility to guarantees and comfort to subscribers. several state governments have passed such legislations, though some are less stringent than others. in view of the magnitudes of such guarantees by many states, banks have been advised to exercise due diligence in subscribing to them. apart from explicit guarantees, recourse is occasionally made by governments to letters of comfort which have a similar effect, and rbi has been dissuading such relatively non - transparent practices. there are, in addition, what may be termed as “ implicit - guarantees ” which have maximum linkage between fiscal and financial sectors. a predominant point of financial intermediation through banks, mutual funds, and insurance, in spite of significant reform is undertaken by publicly owned or government backed financial institutions. hence, public tend to repose confidence with a corresponding implicit direct obligation on the part of government to protect the interests of depositors or investors. such a reasonable expectation is not only justified on the considerations of reputational risk and the concept of “ holding out ’ or backing, but also by the obligations discharged in the past by the government of india, in several cases ; some of them at the instance of regulator concerned. in some cases, banks and financial institutions seek and obtain instructions for direct debit of dues to them from government accounts to ensure the timely recovery of dues to them and thus bring about comfort through credit enhancement. since large scale recourse to such mechanisms, especially when state governments are under fiscal strain has the potential of eroding both the integrity of budget process and the de facto comfort to financial intermediaries, rbi has been vigorously advocating avoidance of recourse to such direct debit mechanisms. the governments have, in its asset portfolio, equity holding and some debts of financial intermediaries that they own, and financial returns on these do impact the fiscal situation. more important, whenever pockets of vulnerability arise in financial sector, the headroom available in the fiscal situation to provide succour to financial entities needs to be assessed. fortunately, on present reckoning, the magnitudes