and that ’ s exactly what they are doing. central government and several federal state governments have decided to invest their pension portfolios according to sustainable criteria. c. financial sector this brings me to the financial sector itself. here, too, we have been seeing attempts to adjust to climate change for a long while : by the banking industry, insurers and funds. a huge amount of capital needs to be mobilised for the transition to a climate - friendly economy – public capital, but even more private capital. in future, this will also mean that sustainable financial products will grow more important in the investment advice given to retail investors – which is what the eu wants. at the same time, financial institutions have to comply with regulatory ratios concerning liquidity and solvency, for example. that ’ s not always an easy task. nonetheless, the past few years have seen a lot of movement in sustainable and, in particular, green forms of financing, both at financial institutions and in the financial markets. financial institutions and financial markets play a central role in the effective and efficient allocation of capital in the real economy. 4 / 7 bis central bankers'speeches financial institutions and financial markets help decide which projects are financed – and which ones are not. we need to leverage this steering effect and thus support the necessary structural change – the transformation of the real economy. here, financial markets have two special features : first, financial markets respond faster to new information than the real economy can. second, the financial system is a global network – this means that climate risks do not remain confined to local or regional areas : they can travel. for their own risk management, financial institutions have to constantly ask themselves anew : which risks are looming where in the balance sheets? how high is the danger of those risks materialising? with climate risk, it is vital to extend the observation horizon. the search for yield is sometimes focused on the short term. climate risk, on the other hand, is of a more medium to long - term nature. it has to form part of the analysis – chiefly because some of the consequences of climate changes are irreversible. but besides risks, there are also opportunities for the financial sector. by allocating capital in a smart way, the financial sector can generate returns and at the same time act as a driver of innovation and growth in the fight to mitigate climate change. the un has recognised this potential and brought together a group of the world ’ s largest pension funds and insurers

am convinced that restoring market mechanisms where they have so far been impeded is crucial for strengthening the euro area ’ s institutional framework as well. a constitutive element of any functioning market monti, mario ( 2010 ) : a new strategy for the single market. bis central bankers ’ speeches economy is the principle of liability. or, as walther eucken put it, “ he who profits must also bear the losses. ” when it comes to two of the biggest economic actors in the monetary union, this principle applies only to a limited extent. banks and sovereigns being a priori deemed systemically important, since turbulence on either front threatens the stability of the financial system, would not bode well for the future stability of the monetary union. a framework in which two of the biggest players are at least partially exempt from the disciplining forces of the market would invite future aberrations and lack resilience. if we are to put monetary union on a sounder footing, such vulnerabilities need to be addressed as a matter of urgency. and, as both problems are so closely intertwined, any attempt to tackle one of them in isolation would be likely to fall short of what is required. let me first take a step back and look at why the close link between banks and sovereigns has proved to be so problematic in this crisis. if many banks get into trouble at the same time, possibly because of a large asset bubble bursting, financial stability as a whole is put at risk. the government then often has no option but to step in if it wants to prevent a meltdown of the real economy. but such a rescue rewards excessive risk - taking and can place a huge strain on government finances – which is what happened in ireland, where the need to support the financial system pushed the deficit above 30 % of gdp in 2010. conversely, weak government positions can destabilise banks – directly through their exposure to sovereign bonds, and indirectly through worsening macroeconomic conditions. breaking the link between banks and sovereigns is important for making the euro area more stable. a banking union can be a big step in that direction – but again, we need to harness the disciplinary forces of the market, not do away with them. core elements of a comprehensive banking union therefore have to be not just an effective single supervisory mechanism, but also a comprehensive bail - in of bank creditors, and a cap on exposure to individual sovereign as well as an adequate risk - weighting of