the fiscal domain. iii. potential effects on interest rates my third topic concerns the potential effects on interest rates : how will interest rates be affected by the sgp reform in the long run? and what is the markets ’ assessment? identifying the impact of fiscal policies on interest rates is a complex task and research conducted in this area in recent years has not resulted in unambiguous conclusions. in addition to seeking to isolate the effects of fiscal policies from other influences ( e. g. growth, inflation, exchange rate expectations ), a particular difficulty lies in trying to identify when exactly “ fiscal policy events ” become “ news ”. the recent agreement on the sgp reform provides a good example of this problem. the announcement and publication of the ecofin agreement on 20 march did not give rise to an immediate, significant reaction in government bond markets. this could suggest that markets were not particularly concerned by the changes. such a conclusion, however, would ignore another fact : that the nature of the reforms had already become apparent gradually over a period of months before the final agreement was signed. thus, it is likely that, by the time the ecofin council had reached its agreement, the market ’ s view of the changes had already been factored into interest rates. nevertheless, a number of studies have provided increasing evidence that interest rate spreads reflect a differentiation of fiscal policies across countries. recent reactions by rating agencies also point to renewed emphasis on this issue. whether these reactions are sufficiently strong is a different matter. it has been argued that the eu fiscal framework in the past might have contributed to high confidence in the sustainability of fiscal policies and thus to low spreads. iv. financial markets, monetary policy and fiscal discipline the final question i would like to touch upon is this : how could financial markets help encourage fiscal discipline? in principle, well - functioning financial markets should reward fiscal prudence and punish unsustainable fiscal policies. it is one of the conundrums of modern - day political economy that, except at times of financial crises, this does not appear to be the case to any great extent. one issue that arises in this context is the extent to which institutional features of financial markets influence such reactions. in the emu context, the “ no bail - out ” clause of the treaty should encourage financial markets to distinguish between more and less risky sovereign issues. but other institutional features may work in the opposite direction. among these features the favourable treatment of government debt under the new basel rules as well as

indicators. the ecb annual report highlights the fact that some developments supported financial stability, including a continued economic expansion and improved bank resilience. however, high risk - taking activities in some financial market segments reflected generally low risk premia. moreover, the absence of clarity related to the outcome of the brexit process contributed to higher political and policy uncertainty. thanks to the preparations made by public authorities and the private sector, a no - deal scenario poses manageable risks to overall euro area financial stability. however, some vulnerabilities remain which could generate more adverse effects if they interact with risks currently affecting the euro area outlook. looking back at this legislative term, the eu ’ s co - legislators have taken important steps in the area of financial regulation, which have helped to make the european financial sector more resilient. many of the main regulatory reforms prompted by the outbreak of the global financial crisis have now been completed. nevertheless, european banks cannot yet operate within a truly integrated framework and european citizens and firms cannot yet reap the full benefits of a genuine single banking market. further efforts are also needed to develop truly integrated capital markets, while at the same time strengthening the regulatory and supervisory framework for the non - bank financial sector. for these reasons, completing the banking union and fostering the capital markets union will remain of paramount importance in the new legislative term. as discussed in the annual report, the ecb continued to provide expertise and technical advice in these areas in 2018. the next few months before the start of the new legislative period provide a perfect opportunity to reflect on the steps that need to be taken to complete the reforms we have undertaken so far. a genuine capital markets union and a complete banking union are crucial to the better functioning of economic and monetary union ( emu ). more integrated markets would deliver meaningful cross - border private risk - sharing which is currently lacking in the euro area by comparison with the united states. on the institutional side, operationalising the common backstop to the single resolution fund and advancing political discussions on a european deposit insurance scheme are essential steps to bolster the resilience and credibility of the banking union. the eurosystem is also playing its role as a catalyst for change by fostering the harmonisation of market standards and directly contributing to the removal of barriers to financial market integration. in order to facilitate the pan - european reach of instant payments, the eurosystem launched an innovative service, target instant payment settlement ( tips ), in november 2018.