supervision that undermine incentives for banks and markets to deliver socially optimal outcomes. in summary, what we support is a regime in which banks face incentives to hold sufficient capital to ensure the probability of failure is reduced because bank management and shareholders are aware that imprudence by them will mean at - risk depositors might run. the capital willingly held by the bank should be sufficient to align incentives of shareholders with those of regulators by ensuring the put option depositors perceive they hold is a long way out of the money. the level of bank capital needs to go beyond that necessary merely to absorb expected losses. bank capital needs to be sufficient to absorb all but the most improbable unexpected losses. in my view, incentive - compatible regulation does not mean setting regulatory capital equal to economic capital. even when depositors and shareholders bear all the costs of a bank failure via riskbased premiums paid to a deposit insurance scheme, unless there is agreement on when it is optimal to socialise the cost of systemic failure, economic capital and regulatory capital will diverge. this is even more likely to be the case when shareholders and taxpayers are in different national communities. it is my contention that bank shareholders and bank creditors should bear a very large proportion of the systemic risk currently laid at the feet of future taxpayers. to shift this risk requires new instruments such as local incorporation and plans to recapitalise failing banks with creditors'money. it is necessary to ensure that capital is really available to absorb losses, and is of sufficient quality and held in sufficient quantity. banks should face incentives to hold closer to the socially optimal level of capital.

assessment in greater detail, starting with the economic analysis. euro area real gdp increased by 0. 3 %, quarter on quarter, in the fourth quarter of 2015, supported by domestic demand, while being dampened by relatively weak export trends. incoming data for the first quarter of 2016 point to ongoing output growth, at a pace broadly similar to that in the final quarter of 2015. looking ahead, we expect the economic recovery to proceed. domestic demand, in particular, continues to be supported by our monetary policy measures. their favourable impact on financing conditions, together with improvements in corporate profitability, is benefiting investment. moreover, our accommodative monetary policy stance, continued employment gains resulting from past structural reforms and the still relatively low price of oil should provide ongoing support for households ’ real disposable income and private consumption. in addition, the fiscal stance in the euro area is slightly expansionary. at the same time, the economic recovery in the euro area is still dampened by the ongoing balance sheet adjustments in a number of sectors, the insufficient pace of implementation of structural reforms and subdued growth prospects in emerging markets. the risks to the euro area growth outlook still remain tilted to the downside. our recent monetary policy decisions have improved overall financing conditions, which should support bis central bankers ’ speeches the outlook for consumption and investment. however, uncertainties persist and relate, in particular, to developments in the global economy and to geopolitical risks. according to eurostat, euro area annual hicp inflation in march 2016 was 0. 0 %, compared with – 0. 2 % in february, reflecting mainly a rise in services price inflation. looking ahead, on the basis of current futures prices for energy, inflation rates could turn negative again in the coming months before picking up in the second half of 2016. thereafter, supported by our monetary policy measures and the expected economic recovery, inflation rates should recover further in 2017 and 2018. turning to the monetary analysis, broad money ( m3 ) continued to grow at a robust pace in february 2016, with its annual rate of growth remaining unchanged at 5. 0 %. as in previous months, annual growth in m3 is mainly supported by its most liquid components, with the narrow monetary aggregate m1 growing at an annual rate of 10. 3 % in february, after 10. 5 % in january. loan dynamics followed the path of gradual recovery observed since the beginning of 2014. the annual rate of change of loans to non - financial corporations ( adjusted for