##italisation, which i touched upon at the start of my speech, also marks a step into uncharted territory for european supervisors. this is enshrined in the new european bank recovery and resolution directive ( brrd ) as an exceptional measure that enables an institution to receive an injection of public funds without - as is generally envisaged being deemed “ failing or likely to fail ”. precautionary recapitalisation is only approved under certain conditions. in particular, the institution must be deemed solvent, and the public funds may not be used to offset existing or anticipated losses. supervisors need to carefully examine whether these requirements are met. additionally, the european commission has to decide whether the granting of public funds is compatible with eu state aid rules. it ’ s a particularly sensitive issue because one of the fundamental objectives of the new resolution rules is to shield taxpayers : it should be a bank ’ s shareholders and creditors who are on the hook for unsatisfactory bank management and any losses that arise as a result, not taxpayers. then again, european legislators have accepted a serious disturbance in the economy of a member state and risks to financial stability as grounds for government intervention to prop up solvent institutions. the stringent criteria outlined in the legislation do actually need to be fulfilled, however. in other words, these conflicting aims make it clear that precautionary recapitalisation cannot be a blueprint for averting bank crises. consequently, precautionary recapitalisation is defined in the brrd as a purely exceptional measure. this is also my clear understanding of the term. what is also clear is that, in each and every instance, shareholders and subordinated creditors need to be bailed in before the government coffers are opened. with regard to italy ’ s monte dei paschi di siena, what this means in concrete terms is that the institution ’ s capital base was first bolstered by €4. 5 billion by converting subordinated debt instruments into equity, with the italian government then injecting an additional €3. 9 billion. however, the government will offer compensation to retail investors, thereby increasing its stake in the bank. the ownership structure will change as a result of the aid provided : legacy shareholders will lose out as their stakes are diluted. by contrast, the italian government will own up to 70 % of the institution. to sum up, the state is providing assistance to an ailing bank and, as an investor, will be exposed

functioning as efficiently as they should. generally speaking, risks and returns are evaluated accurately in capital markets, and both investment and fund procurement are carried out based on the calculations derived from such evaluation. however, in japan, only a limited number of firms issue corporate bonds and, consequently, a sufficient variety of risk - and - return combinations are not available to investors. investors, for their part, are not keen to pursue optimal risk - and - return combinations. additionally, the role of public financial institutions needs to be clarified to improve capital markets. the share of public financial institutions in japan's financial markets is remarkably high, compared with other countries. if the size of public financial institution becomes too big, the risk - and - return combination in the economy may be distorted, and the market economy pricing mechanism may not function sufficiently. i do not deny the role of public financial institutions. in my opinion, there is a definite role public financial institutions should continue to play in the future. yet, over time, the main role of these institutions might come to be restricted to providing credit enhancement measures in the limited areas where there is a need for policy. for example, public financial institutions could play a supporting role in nurturing securitization markets, such as markets for cp backed by receivables of small to mediumsized firms, by providing credit enhancement measures. flexibility in the economic system the third aspect is flexibility in the economic system. policymakers must take appropriate measures on the macroeconomic policy front. they also need to take measures which promote the efficient functioning of financial intermediation. moreover, the economy itself must respond flexibly to environmental changes and various shocks to return to a sustainable growth path. in this regard, it becomes increasingly important for policymakers to take measures, which support the economy to enhance its flexibility. the structural problems in japan were induced not only by the asset price bubbles but also because the economic system could not respond flexibly to substantial environmental changes such as globalization and computerization that progressed rapidly from the latter half of the 1980s to the 1990s, in addition to a declining birth rate and an aging society. responses to environmental changes were repeatedly deferred due to effects of the generation and bursting of asset price bubbles, slow progress of deregulation, and a high degree of intervention of the public sector in the economy. such deferral constitutes one of the major factors behind the current severe situation japan's economy finds itself in. in order to bring japan's