say. severing the anti - clockwise loop means giving banks better protection against distressed government budgets. breaking through the clockwise loop, meanwhile, means making public finances more resilient to faltering banks. let me take you on an imaginary journey, if i may, in both directions. 4. anti - clockwise doom loop – sovereigns infect banks if it is the anti - clockwise doom loop we are looking to tackle, there are essentially two ways in which we can shield banks against distressed government finances. first, we can make government budgets inherently more stable, thereby reducing the likelihood of them getting into trouble. second, we can introduce regulatory requirements to ensure that banks are better protected in the rare event of a sovereign running into difficulties. 4. 1 preventing fiscal distress safeguarding the stability of government budgets is quite a challenge in the euro area on account of the specific structure of monetary union. what makes the european monetary union special is that it combines a single monetary policy with national fiscal policies. the monetary policy for the 17 countries of the euro area is decided by the governing council of the ecb in frankfurt. however, the fiscal policies of the 17 members of the euro area are decided by the national governments and parliaments – each country decides itself on its own government revenue and expenditure. with such lopsided responsibilities, the individual countries have incentives to run up debt. at the end of the day, borrowing costs are distributed among all the member states of monetary union – either indirectly via higher interest rates for everyone or – as is now the case in the crisis – directly via the rescue packages. in the end, the community is jointly liable for the manner in which individual countries manage their budgets. liability and control are out of step. basically, there are two ways to realign this imbalance : either the european level gains certain control rights over national budgets – which would mean deeper political integration. bis central bankers ’ speeches or we leave control of fiscal policy at the national level. but then the national level also has to assume liability for its policy – that would mean strengthening the existing framework of monetary union. the first path would amount to what is known as a fiscal union. but that would depend on the countries of the euro area transferring national sovereignty to the european level – for example, by giving the european level the right to intervene in the case of unsound government budgets. such a waiver of sovereignty would be a radical change and require wide - ranging amendments to national and european legislation

solution to the “ too big to fail ” problem will be critical in order to protect public budgets from banks ’ distress. what we need is a resolution mechanism which will allow even large banks to be resolved without jeopardising the financial system or requiring the taxpayer to foot the bill. looking towards europe, this is where the second element of the banking union comes into play : a single recovery and resolution mechanism for banks. what will initially be decisive here is to define a clear liability cascade. who is liable when banks founder? shareholders and creditors undoubtedly should be at the very front of the line when it comes to shouldering losses. taxpayers should be the last link in the chain, if they are even in the chain to begin with. a bank recovery and resolution directive, which would cover all these factors and thus represent a great step forward, is currently being discussed at the european level. the draft version currently on the table, however, still leaves discretionary scope in deciding the extent to which creditors shall be held liable. in the interests of market discipline, that should be changed. it is also important that the resolution mechanism be introduced at the same time as the ssm, if at all possible. on the whole, however, the banking union is a key milestone on the way to a stable monetary union, not least because it will help to sever the sovereign - bank doom loop – at least clockwise. 6. conclusion ladies and gentlemen, we have examined the crisis from the perspective of financial stability. a key element is the doom loop of mutual contagion between banks and sovereigns, the vicious circle. we will have to pull levers at several different places in order to sever this loop. we have to improve the framework of monetary union, especially with regard to the rules for sovereign debt. we have to adapt banking regulation. we have to elevate banking supervision to the european level. and we have to establish mechanisms which allow banks to be resolved without impacting on public budgets or taxpayers. we should remain aware, though, that we will not be able to solve all problems through government regulation and government supervision. financial stability starts first and foremost with banks themselves. it is the responsibility of banks to act as carefully and prudently as possible. and, in that respect, the banks squandered much in the way of confidence during the crisis. changes are needed here, ladies and gentlemen. we need a change of culture in the banking world. banks have to return