policies could also help foster a strengthening in the composition of firms ’ liabilities towards a higher share of equity, including the removal of the preferential tax treatment of debt versus equity and progress towards the development of equity markets in europe. thank you for your attention. see special feature a “ financial integration and risk sharing in a monetary union ”, in financial integration in europe, ecb, april 2016 and box 1 “ what could enhance private financial risk sharing in the euro area? ” in financial integration in europe, ecb, may 2018. see also asdrubali, p., sorensen, b. and yosha, o., ( 1996 ) “ channels of interstate risk sharing : united states 1963 - 1990 ”, quarterly journal of economics, 111, 1081 - 1110 ; athanasoulis, s. and van wincoop, e. ( 2001 ) “ risk sharing within the united states : what do financial markets and fiscal federalism accomplish? ”, review of economics and statistics, 83, 688 - 698.

classified even after performance under the modified terms is demonstrated. asset classifications taking this a step further, now might be a good time to review the definitions and usages of asset classifications. right now, the definition of a substandard loan encompasses a broad range of assets, many of which will never sustain a loss. yet our classification and bank rating system gives the same weight to all loans in the same classification bucket, regardless of loss potential. as a result, when a bank starts to approach a level of classification that it believes would cause examiners to downgrade its camels7 rating, the bank stops making loans that it believes will be classified even if there is no concern about actual losses from the loans. there was an interagency proposal issued in 20058 that would have established a two - step process for classifying commercial loans. the first step would be to evaluate the loan ( the probability of default ) and the second step involved estimating the potential loss ( the loss given default ). many larger banks already use this approach in their own internal loan classification systems. on the other hand, many commenters at the time, including those from both small and large banks, objected to the proposal for a variety of reasons and the agencies decided to table it for the time being. still, as i went back and reviewed the proposal, it struck me that some form of such guidance could be helpful in responding to the complaint that i hear over and over that loan classifications often ignore the loss protection provided by guarantors or collateral. and i think it might allow more accurate measurement of credit risk in all loan portfolios, not just commercial loans. so we are continuing to study the idea and the effect it might have on asset quality ratings if it was applied to different portfolios. ratings upgrades i also believe that when conditions warrant a change in camels ratings, the update should take place as quickly as possible. it is always important to promptly identify problem banks and make use of all supervisory tools to foster their recovery. but i believe that as a bank stabilizes and demonstrates improvement, we should ensure that examiners move just as promptly to assign ratings that reflect the improved financial and managerial condition of the bank and free it from restrictions that could delay the bank ’ s return to prudent lending activity. encouraging creative supervisory approaches to emerging problems so far, i have talked mainly about making adjustments to conventional supervisory approaches. in some cases, however, i think it might make sense to challenge some of our