speech building the financial system of the 21st century speech by luis de guindos, vice - president of the ecb, at the 20th annual symposium on “ building the financial system of the 21st century : an agenda for europe and the united states ” organised by the program on international financial systems and harvard law school ( by videoconference ) frankfurt am main, 19 may 2022 it is with great pleasure that i am taking part in this symposium once again. it is hard to believe how much has happened since we last met two years ago. in my remarks back then, i touched upon the enhanced resilience of the banking sector following the design and implementation of the basel iii regulatory framework – a long process that was set in motion in the aftermath of the global financial crisis. since that crisis, and the ensuing sovereign debt crisis, the euro area has been hit by two unrelated but sequential global shocks : first, the pandemic and then the massive surge in energy prices exacerbated by the russian invasion of ukraine, which has so far affected europe more than other parts of the world. to use some jargon, these were “ low probability ” events. but they materialised in rapid succession with a large impact on inflation at global level. so it is not easy to be a central banker right now. in the euro area, we moved from having to deal with stubbornly low inflation levels for almost a decade to the highest inflation figures since the creation of the euro, while also having to contend with extraordinary uncertainty surrounding inflation dynamics. today, i will give a brief overview of the current economic situation in the euro area, and then share our assessment of the current risks to the overall stability of the financial system. economic outlook just as we were getting the pandemic and its economic implications under control, geo - political tensions in europe erupted. russia ’ s war against ukraine has cast a dark shadow over our continent and is likely to trigger a slowdown in growth and higher inflation in the near - term. after the largest contraction on record in 2020, the euro area economy transitioned to a firm path of recovery in 2021. however, rising inflationary pressures that had been building up since the latter half of last year and renewed pandemic - related restrictions look likely to have slowed the momentum of the recovery in 2022. the russian invasion of ukraine exacerbated these pressures on account of large rises in commodity and energy prices. the war has also created new bottlenecks on top

- cyclical. from a pure economic view point, the financial crisis, its length, rising debt levels and rating downgrades to sovereigns reduced the amount of available assets that are considered ‘ safe ’, particularly for non - banks ( although regulators treat all sovereigns as risk - free ). this is most easily visible in the current clustering of gc collateral rates by country of issuer, which was largely absent prior to the crisis. on the demand side, the evolution of prudential regulation has affected the repo market. a number of features, which have in principle been known since the reform of basel iii in 2010, are still being phased in and directly affect banks ’ participation in the repo markets, particularly the liquidity coverage ratio ( lcr ) and the net stable funding ratio ( nsfr ). a third measure – the leverage ratio – is now subject to reporting requirements, but there is not as yet an agreed international regulatory standard. the lcr requires banks to hold sufficient high - quality liquid assets ( hqla ) to cover projected net cash outflows. it started being phased in at the start of 2015 and reaches full application by 2018. the lcr consequently makes short - term funding less attractive to banks and holding hqla more attractive. the requirement to meet this ratio is likely to be a contributory factor in market volatility around reporting dates. the nsfr is designed to reduce bank reliance on short - term wholesale funding relative to more stable sources of funding. it penalises short - term funding, including repos of shorter maturity than one year, particularly those under six months. the nsfr also penalises matched book transactions, since the negative impact of the reverse repo leg more than offsets the positive impact of the repo leg. overall, the impact from the nsfr on short - term repo is reckoned to be lower supply, reducing volumes and increasing the price. the leverage ratio, which has been implemented in the united states for some time, is a deliberately simplified way to assess banks ’ riskiness. traditional bank capital ratios are calculated as capital over risk - weighted assets. the leverage ratio is calculated approximately as capital over total assets, with no attempt to employ risk weights. this is important for the repo market because sovereign bonds typically attract a zero risk weight. as such, carrying out repo as a large volume, low margin activity is threatened by the leverage ratio. although the exact parameters of the leverage ratio regulations