and an end to supervisory divergence. to give some examples, research suggests that the economies of scale from within and cross - country banking m & a could be sizeable in terms of, among other things, information technology and corporate overhead costs. 4 banks that implement a pan - european balance sheet strategy could also access a more diversified customer base and, under the single supervisory mechanism, optimise their use of capital and liquidity. and being european provides a platform for banks to launch new products on a european scale, thus increasing the returns to investment and innovation. cohen, b. h. and m. scatigna ( 2014 ), “ banks and capital requirements : channels of adjustment ”, bis working papers no. 443, march. for example, the herfindahl - hirschman concentration index ( hhi ) for the euro area currently stands at around 700. as a general rule, an hhi below 1, 000 signals low concentration, while an index above 1, 800 signals high concentration. for values between 1, 000 and 1, 800, an industry is considered to be moderately concentrated. see ecb banking structures report, october 2014. kovner, a., j. vickery, and l. zhou, “ do big banks have lower operating costs?, ” federal reserve bank of new york economic policy review, volume 20, no. 2, forthcoming. bis central bankers ’ speeches in short, there is every reason for banks to capitalise on the opportunity provided by banking union and turn themselves into genuinely european players. and this would go a long way towards creating a banking sector with the resilience and capacity to maintain the essential social function of lending to europe ’ s smaller firms. but addressing the sme issue is not only about banks adapting ; it is also about policymakers in various fields setting the right incentives for banks. that means, first of all, ensuring that banking union delivers on its promise – that the era of national champions is really over. but it also means making a rigorous assessment of the wider policy environment confronting banks – and the various ways in which it might be holding back bank lending. in my view there are three areas in particular where we could make improvements. the first is by accelerating efforts to put the legacy of the crisis behind us. for example, there is a great deal more that could be done at the national level to make npl workouts more efficient, like improving intercreditor mediation or in -

will be contractionary. see the literature on “ expansionary fiscal contractions ”, e. g., alesina and perotti ( 1995 ), and giavazzi and pagano ( 1990 ). such measures include an increase in the size, frequency and maturity of liquidity providing operations. a number of central banks have also purchased financial instruments issued by the public or private sector. http : / / www. ecb. int / press / pr / date / 2012 / html / pr120906 _ 1. en. html. bis central bankers ’ speeches debts and rules embedded in the institutional arrangements underpinning the ecb that are intended to make it impossible for governments to finance themselves by way of privileged access to central bank funding. 4. 1 rules on debts and deficits since the establishment of the maastricht treaty in 1992, the eu has introduced a number of fiscal rules. in 1997, the stability and growth pact ( sgp ) introduced rules intended to ensure fiscal discipline. these rules, which essentially limited fiscal deficits to 3 % of gdp and public debts to 60 % of gdp, however, suffered from poor compliance in the eu, even before the crisis took hold ( figure 5 ). the onset of the present fiscal crisis has exposed a number of weaknesses in the sgp framework including the lack of a definition of a “ satisfactory pace ” of debt reduction, poor enforcement mechanisms and the fact that the assessment of compliance was often based on overly optimistic underlying budgetary forecasts. in response to these deficiencies, a much strengthened sgp, known as the six pack, entered into force in november 2011, entailing a stronger preventative arm and with stronger corrective action requirements. the six pack ensures stricter application of the fiscal rules by defining quantitatively what constitutes a “ significant deviation ” from the medium term objective ( mto ). the mto is the required structural balance which will ensure sustainability of the public finances, set out in the sgp. furthermore, an excessive deficit procedure can now be launched when a country ’ s debt is in excess of 60 % of gdp, and not only on the basis of a deficit exceeding 3 % of gdp, as was previously the case. finally, financial sanctions for euro area members can now be imposed at an earlier stage and in a proportionate and graduated manner. furthermore, the timely imposition of such sanctions is now more likely since the voting rules have been changed. the most recent art