##ation has started to emerge in the public debate and consequently proposals for deregulation and arguments for greater supervision discretion have been put forward. this discretion poses serious problems of transparency and of equal treatment, due to the temptation to shape the financial system by handing regulatory powers over to supervisory authorities. a clear distinction should be made between regulatory and supervisory functions. this segregation is key to ensuring a greater balance of powers and responsibilities, allowing proper accountability. 2. regulatory arbitrage the financial crisis also showed the limitations of decentralised supervision in a world of increasingly integrated financial markets and institutions. we are now in a process of moving from a situation in which the regulatory and supervisory frameworks were of national competence to a situation where there are common rules and in the euro area also a common supervisor. a need for greater cross - border integration of financial regulation and supervision emerged from the policy debate and motivated the still on - going reform of basel rules and the creation of the banking union in europe. however, the degree of implementation of the post - crisis global regulatory reform agenda across countries varies significantly, giving rise to regulatory arbitrage. this is reflected in the search for gaps in national legislation that justify avoiding compliance with previous international agreements, as well as in the behaviour of the authorities that accommodate specific requirements, conditions and interests of the major international financial conglomerates. it is very important to identify and assess what the risks and cost of regulatory arbitrage are. 3. regulatory flaws in the european regulation the current banking union framework suffers from a critical weakness : its micro approach to managing banking crises disregards the financial stability risks resulting from interventions in ailing banks. the current resolution framework does not envisage a credible public backstop and lacks government stabilisation tools. in fact, the framework governing intervention in problematic banks does not take into account the fact that the need to preserve financial stability must always prevail over the specific rules of intervention in banks. as recent cases illustrate, the european bail - in framework does not exclude bail - out events when financial stability issues ( or the public perspective of it ) are at stake. in addition, there is also the question of whether the lender of last resort is prepared and willing to lend all the liquidity that is needed when a bank is in distress but is still solvent. otherwise, the trigger for a banking failure is not insolvency but illiquidity. another limitation stems from the rules on mrel ( minimum requirement for own funds and eligible

also aware of the problems of maturity mismatches on balance sheets, the challenges of raising levels of capital and the cyclical risks related to the downturn. challenges for europe ’ s economic and monetary union let me now turn to the overall functioning of europe ’ s economic and monetary union. looking back at 2010 and 2011, notable progress has been achieved in reinforcing economic governance – though i recognise that this may not be evident in times of crisis. the european parliament has contributed decisively to that progress, and the ecb commends that work. the “ six pack ”, the european semester, the euro plus pact : all these initiatives have set the stage for closer coordination and more intensive scrutiny of economic policies in the eu, particularly in the euro area. yet we are at a difficult stage at present. we have set up these new mechanisms, but their positive effects on the credibility of government fiscal policies are not yet visible. and the government changes that have taken place in some of the more exposed countries have not yet had much of an effect on the continuing fragility of financial markets. fundamental questions are being raised and they call for an answer. at the heart of these questions are not only the credibility of governments ’ policies and the actual delivery of the promised reforms, but also the overall design of our common fiscal governance. i am confident the new surveillance framework will restore confidence over time. i am also quite sure that countries overall are on the right track. but a credible signal is needed to give ultimate assurance over the short term. what i believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made. just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively. bis central bankers ’ speeches we might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer - term vision can be helpful in the short term. our answer is that it is definitely the most important element to start restoring credibility. other elements might follow, but the sequencing matters. and it is first and foremost important to get a commonly shared fiscal compact right. confidence works backwards : if there is an anchor in the