overs to the wider financial system and the real economy, as funding flows might recede and the cost of corporate financing might increase. against this background, we need to think about potential gaps in the current regulatory framework. in particular, we should embark on developing a macroprudential framework for the non - bank financial sector, which is still in its infancy. additional policy instruments should ensure that non - banks can sustain their financing of the real economy under different economic conditions. they should aim to mitigate risks related to procyclical risk taking and excessive leverage, liquidity and maturity transformation. one could consider macroprudential restrictions on fund leverage and additional liquidity management tools that align redemption terms more closely with the liquidity of funds ’ assets, for example. the policy tools should also provide incentives for non - banks to internalise the impact that their actions have on the rest of the financial system and the real economy. in particular, such policy tools could mitigate non - banks ’ potential to amplify exuberance in upturns and adversely affect financial and economic conditions in downturns. of course we cannot have a one size fits all approach for non - banks and we need to account for differences in balance sheet structures and business models when designing any macroprudential policy framework. but the growing size of non - bank financial institutions, their greater importance to the financing of the real economy and their interconnectedness with the rest of the system highlight the importance of developing a sound macroprudential framework for this sector. conclusion let me conclude. currently, one of the most significant vulnerabilities of euro area banks relates to their weak profitability prospects. the lacklustre outlook reflects both structural and cyclical factors. the banking system is operating with significant overcapacity resulting in persistent cost inefficiencies and competitive pressures. at the same time, the weaker cyclical momentum and associated low interest rates are weighing on bank profitability, although monetary policy accommodation has supported lending volumes. however, we need to acknowledge that banks have made significant progress in repairing balance sheets since the outbreak of the financial crisis. nevertheless, a rebalancing of the current composition of capital requirements towards a more prominent role for the ccyb could help mitigate costly economic deleveraging in downturns. non - bank financial intermediaries have grown rapidly over recent years in the euro area, which is a welcome development. but similar to banks, they are

their lowest level since 1997. the same story is visible for employment. in early 2014 the vast majority of euro area headcount growth was coming from germany. as that year progressed the contribution from spain began to rise, driven by the recovery in activity and previous labour market reforms. and since the second half of 2015 the employment turnaround has extended into other formerly stressed economies as well, including in particular italy, ireland and portugal. just as for gdp growth rates, the dispersion of employment growth across euro area countries is now at record low levels. so though the risks to the growth outlook remain tilted to the downside – mainly on account of the geo - political factors i mentioned earlier – the balance seems to be shifting upwards. this is reflected in recent sentiment indicators, which suggest that the recovery may be gaining momentum. the latest euro area composite purchasing managers ’ index ( pmi ), for example, which is a reasonably consistent leading indicator for euro area gdp growth, gave the highest reading since april 2011. 3 / 6 bis central bankers'speeches this was also the assessment of the governing council at its last monetary policy meeting in march, where the staff projections for growth in the coming years were revised slightly upwards. and in light of the improving risk outlook, the council affirmed that it is no longer concerned about deflation risks, nor do we perceive a sense of urgency to take further measures to combat adverse tail risks. inflation dynamics depend on continued policy support yet despite these signs of progress, it is clearly too soon to declare success. in important ways the outlook for price stability remains unchanged. in particular, while growth and employment rates have been converging upwards across the euro area, significant gaps still remain in terms of levels. in large parts of the euro area there are still substantial under - utilised resources, reflected in a negative output gap and high unemployment rates. and this is of course crucial for our assessment of the path of inflation – namely, whether we see a sustained adjustment that would warrant a scaling back of our exceptional degree of monetary policy accommodation. let me remind you that we have established four criteria to confirm a sustained adjustment : first, that headline inflation is on a path to levels below but close to 2 % over a meaningful mediumterm horizon ; second, that inflation will be durable and stabilise around those levels with sufficient confidence ; third that inflation will be self - sustained, meaning it will maintain its trajectory even with diminishing support from monetary policy. and finally,