##tails the risk of running out of oxygen. but coming up too quickly may cause decompression sickness. hence, banks need to be resilient to both interest rate scenarios : rates that stay low for longer than expected, and rates that spike higher. just as many criminal cases have to be solved by piecing together small shreds of evidence, the german financial stability committee here had to assess the cumulative weight of the clues they had gathered. and these clues did point to a common suspect : the possible underestimation of risks and increased vulnerabilities in the financial system. the preponderance of evidence suggests that macroprudential action is in order. in the event of an unexpected severe economic slump, the identified risks in the financial system could materialise simultaneously, forcing many banks to cushion losses. without sufficient buffers, banks might seek to offload assets and cut back on lending, thereby aggravating the economic downturn. higher capital buffers make the financial system more resilient to adverse shocks. in contrast to other regulatory capital, the buffer is not designed to be permanent. banks can draw on this buffer in times of stress. likewise, authorities can reduce or eliminate the buffer if the vulnerabilities in the financial system have dissipated. in this way, activating the countercyclical capital buffer now should serve as insurance against future financial turbulence. 2. 2 macroeconomic conditions and the timing of macroprudential policy action the word already implies it : when judging whether to activate a countercyclical buffer, the question of timing is vital. activation bears important consequences for banks. therefore, such a measure must be taken with legal certainty. thorough investigations were necessary and meant observing the financial system over a longer period of time. all the available evidence needed to be gathered and carefully assessed. its cumulative weight had to be substantial to warrant action. this is why the recommendation comes at this point in time, not earlier. some observers may wonder whether the window for action has already closed, given that the german economy has been cooling down markedly since the middle of last year. according to bundesbank macroeconomic projections published two weeks ago, economic activity is likely to grow by just 0. 6 % this year. but our experts consider this to be a soft patch that is largely due to a slowdown in external demand, weighing on export - oriented sectors. indeed, manufacturing has entered a downturn. by contrast, sectors with a greater

##ent supervision ensures that tough rules are equally applied to all. the single restructuring mechanism currently under discussion is necessary in order to establish a bail - in regime that assigns a clear hierarchy of creditors. only then will credit costs adequately reflect credit risk ; and shareholders and creditors instead of taxpayers will be first in line to bear banks ’ losses. but the sovereign - bank nexus goes both ways. we also have to address spillovers from sovereigns to banks. we therefore need to end the preferential treatment for sovereign debt. the basel capital rules allow governments bonds issued in domestic currency to be given a zero risk weighting. but with regard to the euro area, the assumption that all sovereign bonds are risk - free means that all bonds are treated alike regardless of fundamentals. this calls into question market discipline, and is, obviously, not in line with recent history. hence, sovereign bonds should be adequately risk - weighted, and exposure to individual sovereign debt should be capped, as is already the case for private debt. an adequate risk - weighting of sovereign bonds would make banks more resilient if the fiscal position of the respective sovereign were to deteriorate ; and it would bring spreads more into line with the underlying risk, thus giving a disciplining signal to the sovereign. in an interview with the german newspaper “ die welt ”, ken rogoff pointed out that the adequate riskweighting of sovereign bonds constitutes a far more effective debt brake than any fiscal rule ever could. besides, many european banks hold bonds from one sovereign only – their home country. large and undiversified exposure is what makes sovereign default a potentially systemic event. hence, the large exposure regime which caps the investment in one single debtor has to be applied to sovereigns as well. ending the preferential treatment of sovereign debt would greatly reduce the risk of a financial crisis in case of sovereign default. it would therefore go a long way towards reestablishing the principle of individual responsibility in fiscal affairs. 4. conclusion ladies and gentlemen, let me conclude. the idea of monetary policy safeguarding stability on multiple fronts is alluring. but by giving in to that allure, we would likely end up in a world even less stable than before. this holds true especially for the euro area, where a eurosystem acting as a lender - of - last - resort role for governments would upend the delicate institutional balance. to disentangle the euro area ’ s fiscal and financial conundrums