can keep the gains but pass potential losses on to someone else, you might be tempted to take on too much risk. so, in practice, the market has its shortcomings. but is that a reason to do away with it? no, not at all. we should try to make it work. for the banking sector, this means aligning incentives. and as i just mentioned, the best incentive to keep risks in check is potential failure and financial loss. as the economist allan meltzer noted : “ capitalism without failure is like religion without sin. it doesn ’ t work. ” but in banking, there was a lack of failure. during the crisis, many banks that should have failed did not fail. instead, governments propped them up with public funds – at huge cost to taxpayers. they did so out of fear of a systemic crisis. they were worried that when a large bank fails, it would drag others down and destroy the entire system. so there was a situation where banks could pass on any losses to someone else while keeping any profits. they had an incentive to gamble with other people ’ s money. so, we need to make it possible for banks to fail without causing the whole system to collapse. and we need to make sure that profit - makers are also loss - takers. that would align incentives, strengthen market discipline and keep risk - taking in check. in europe, we now have a new system for exactly that purpose : the single resolution mechanism, srm for short. the srm provides the tools to resolve banks in an orderly manner. earlier this year, it passed its first test when a couple of banks failed. this was a huge step towards imposing market discipline on banks and making them safer and sounder. and i can confirm that dealing with a failed bank is among the most complex things you can do as a supervisor. the first step is that the ecb declares the bank failing or likely to fail. and that, in itself, is a delicate matter. a bank can fail for a million reasons. sometimes it is a slow death that drags on over weeks and weeks. sometimes it all happens within a couple of days. in the end, it is up to the ecb to decide whether the moment has come, and that is a decision which cannot be taken lightly. taking it too early might infringe the rights of investors and creditors. taking it too late might lead to a systemic crisis ; it might harm the economy and society.

sabine lautenschlager : european banking achievements, challenges and the way forward supervision - speech by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the european central bank, at the ese conference 2017, vienna, 28 september 2017. * * * “ what does it mean to be human? ” this question has preoccupied philosophers for hundreds of years. one of the more popular answers is that humans are rational animals – a view that goes back to aristotle. let us take that question and adapt it to our world : what does it mean to be a european banking supervisor? the answer is certainly not that banking supervisors are rational bankers. but apart from that, being a european banking supervisor means many things. first of all, it means looking across borders. it means being tough and fair, unbiased by national interests. for us, it means being part of a team of supervisors from 19 countries and 27 institutions. it means working in the public interest – and having an exciting job. but it also means dealing with many challenges at the same time. and it is these challenges i ’ d like to talk about in my speech. but as there are many and as our time is limited, i have to make a choice. so let me first tell you what i won ’ t do today. i won ’ t discuss the bringing together of cultures and languages that are very different. i won ’ t discuss dealing with banks that struggle to remain profitable. i won ’ t discuss digitalisation, and i won ’ t discuss brexit. instead, i will focus on three issues : first, the rulebook for banks and how it relates to supervision ; second, the toolbox that supervisors have at their disposal ; and third, the role of the market. supervisors and the rulebook a solid rulebook is a cornerstone of a stable banking sector. it ensures that banks acknowledge the risks they take and build up adequate buffers. a solid rulebook lays the foundations for banking supervisors to do their job. since the financial crisis, the rulebook for banks has been thoroughly revised. today, banks face much tougher rules than before. they need to hold higher capital buffers that consist of better capital. at the same time, they need to hold liquidity buffers – for the first time ever. and these are just two of the things that help to make banks more resilient. so the regulatory