level, smaller banks are more sensitive to changes in interest rates – their earnings are more reliant on interest - generating business than they are at larger banks. at savings banks and credit cooperatives, net interest income makes up more than two - thirds of total net operating income – i guess that won't be news to you, ladies and gentlemen. against this backdrop, i will now focus 1 / 4 bis - central bankers'speeches my attention on this subset of banks and leave andrea enria to take a look at the big banks. one factor that determines how rising interest rates affect banks is the time horizon. over the medium to long term, increasing rates are certainly welcome news. they mean that higher - yielding exposures will probably increase on the assets side of the balance sheet, while rising rates are passed on only in part to depositors on the liabilities side, thus widening the interest margin. in the short term, though, it's a somewhat different story. for one thing, most banks have to revalue many more items from their current liabilities than they do on the assets side – which means that many institutions will probably see their interest expenditure rise more sharply than their interest income, to begin with. to make matters worse, the yield curve was very flat for a very long time, forcing many banks to transform maturities on a substantial scale – you see, the flatter the yield curve, the wider banks have to make the gap between the maturities of their assets and liabilities in order to still be able to generate stable margins. this has left these institutions even more vulnerable to an abrupt uptick in interest rates. time will tell whether and to what extent these risks now materialise. for another thing, rising interest rates depress securities prices, especially at banks that have not hedged securities holdings on their balance sheets – and these tend to be smaller banks, for the most part. an interest rate shock of 200 basis points would now result in a situation where around half of all institutions saw the present value relative to regulatory own funds decline by more than 20 %. the challenge would be even stiffer still if the yield curve inverted – that is, the level of long - term interest rates were to fall below that of short - term rates – which isn't an unlikely scenario given the looming recession. how are banks addressing this situation? what we are seeing is that german banks are increasingly liquidating their hidden reserves for securities. and it is indeed the

rescue measures helped to prevent the crisis from escalating. but they did so by mutualising fiscal liability on a substantial scale. fiscal and economic policies, on the other hand, essentially remained a national prerogative, though the fiscal rules have admittedly been adapted. as a result, the balance between liability and control has been thrown out of kilter. however, striking an even balance between liability and control is crucial for the functioning of emu – and that ’ s a point i made in my last speech in amsterdam 2½ years ago. and i also said in my speech back then that there are two possible ways to restore the balance between liability and control : deeper integration, or more individual national responsibility on the part of the member states. the first solution would be to create a fiscal union with centralised decision - making powers. only within this framework would fiscal transfers and mutual liability via eurobonds be consistent and put control and liability back on an even keel. while a fiscal union would not guarantee sound fiscal policymaking, it could certainly mitigate the deficit bias of individual member states. and interestingly, even for karl otto pohl, the former bundesbank president who was a member of the delors commission, the “ fiscal union approach ” was the intuitive one : “ in a monetary union with irreversibly fixed exchange rates, the weak would become ever weaker and the strong ever stronger. we would thus experience great tensions in the real economy of europe. for this reason alone, monetary union without the simultaneous integration in fields like fiscal policy as well as regional and social policy is completely inconceivable. " but let ’ s be honest here : a fiscal union approach was not on the cards 2½ years ago, and it has become ever more improbable since then. the outcome of the brexit referendum has laid bare the scepticism about the european project and a tendency to reject further integration steps. surveys reveal that many citizens in the eu doubt whether the existing process of integration is still sustainable. this is possibly not unrelated to the fact that the ongoing debate over the right response to the crisis in the euro area has brought out into the open the persistent differences of opinion in fiscal and economic policy matters. 5 / 9 bis central bankers'speeches this is all the more astonishing because the euro - area countries had actually already established a consensus on the appropriate role of fiscal policy – as documented in the stability and growth pact. so building trust in