tightly integrated regulatory and supervisory structure in the euro area. second, given the crisis of confidence in the financial markets, backstops have to be identified to ensure the stability of the financial system, in particular banks. this means that markets – not only supervisors – have to be convinced that banks can withstand a worsening of the situation, both in terms of access to liquidity and in terms of absorbing potential losses through capital. the provision of liquidity is the responsibility of the central bank. ten days ago we decided to conduct two longer - term refinancing operations with a maturity of about one year, at fixed rate with full allotment. we also decided to continue conducting our main refinancing operations at fixed rates with full allotment against collateral at least until mid - 2012. we also launched a new covered bonds purchase programme. however, national treasuries are responsible for ensuring that the banking system is adequately capitalised. higher capital is required in particular as a precautionary measure, with a view to reassuring the markets. however, given that the markets are now quite nervous, we should avoid promoting solutions which end up producing the opposite result, in particular having a permanent excess of capital and entrenching the idea that euro area public bonds are unsafe assets. there is also a risk that if banks are given too much time to secure the desired capital ratio, they will achieve it through a de - leveraging and a reduction of their assets, thus bis central bankers ’ speeches triggering a credit crunch. what is needed is a credible backstop for the banking system which can be used quickly to absorb potential losses, if they materialise. at the current juncture, higher capital in the banking sector could help to reduce the negative feedback loop between the sovereigns and the banks, through several channels. with higher capital buffers banks would be able to withstand larger external shocks, including those stemming from the difficulties of the domestic or a foreign sovereign. in addition, wellcapitalised banks would have less of a need to de - leverage and to liquidate their exposure to sovereign debt. finally, being less vulnerable to systemic risks would mitigate the perceived credit risk of the sovereign itself, and in this way contribute to lowering its financing cost. the third element of the comprehensive solution is the backstop to the sovereign risk to convince markets that liquidity problems affecting the euro area members will not translate into solvency problems. the european financial stability facility has been put in place

. the reaction to the agreement among euro area leaders on 21 july has proved that reality differs from dreams. contagion is also difficult to understand, especially for those far away from the immediate chain of events, and who are not immediately affected. for instance, it was difficult for many us citizens and members of congress to grasp the impact of the lehman brothers ’ failure – as shown by the initial rejection by congress of the administration ’ s proposal to establish the troubled asset relief program ( tarp ). but they understood its impact when the contagion hit the stock market and caused banks to panic. in europe, the countries with stronger fiscal positions have also had difficulty understanding the potential disruption that contagion from the crisis – unfolding in the periphery – would have on their own economies. the political and market constraints that a policy - maker faces tend to be contradictory. for example, the best way to deal with contagion is to act quickly, with enormous firepower – the “ bazooka ” as hank paulson used to call it. but it is very difficult to secure a political consensus for having such bazookas, especially if the firepower involves taxpayers ’ money. it ’ s only possible if taxpayers really feel threatened and are convinced that the risk of not having a bazooka is greater than the risk of having one. they may sense this risk only when contagion is widespread, and markets have become extremely tense, but at that point the socalled bazooka may no longer be sufficient to restore stability. in other words, the less taxpayers ’ money you spend at the start of the contagion, the more taxpayers ’ money you may ultimately have to spend to avoid serious financial disruption. policy - makers thus face two difficult tasks. they have to weigh the consequences of taking certain actions against the consequences of not taking them, and choose the least worst solution. and, they have to convince taxpayers, and their representatives, that there is an even worse solution than the least worst option that they have chosen. the third constraint that policy - makers have to take into account nowadays is the scarcity of resources available to tackle multi - dimensional problems like those posed by the crisis. at the outset, in autumn 2008, european countries were able, for example, to stabilise the situation by providing public guarantees to banks. ireland was one of the first countries to make such a commitment. in the us the tarp was adopted, with the initial aim being to