risk premia are not relevant. but there may be other channels of adverse spill - overs from the sovereign to the corporate bond markets : a country with significantly higher sovereign financing costs would need to reduce its fiscal deficit, and would be expected to take fiscal consolidation measures, including increases in corporate taxes. this would potentially dent into firms ’ profits, worsen their credit risk assessment and drive up their credit risk premia. so what is the empirical evidence so far? during several phases of the crisis, bond yield spreads for euro area non - financial corporations showed distinct co - movement with the respective sovereign bond yield spreads. this may be explained by common factors which affected both a country ’ s fiscal position and its firms ’ profitability, or by changes in risk perceptions that affected both types of credit spreads. however, we have also observed episodes of decoupling between developments in sovereign and corporate credit risk premia. lately, it turned out that sovereign credit risk premia ( in terms of cds spreads ) did not always provide a floor for all corporations operating in the respective country. a case in point is that cds premia of several euro area telecommunication companies ranged above the respective sovereign cds spreads in 2008 and early 2009, but this relation has been reversed during various periods thereafter. ( slide 6 ) the crisis has also shown that there are several channels through which deteriorating public finances and worsening sovereign credit risks can spread to the financial sector and affect the credit risk of financial institutions. spreads on cds contracts for larger banks and the sovereign cds for government securities of the countries where these banks are domiciled have moved together over the past six months. ( slide 7 ) two snap - shots are shown on this chart, one on 30 september 2009 and the other on 26 march 2010. between these two dates, as sovereign cds spreads rose, so did bank cds spreads, and in some cases substantially so. this important pass - through of sovereign credit risk to bank funding costs is in the opposite direction from the feedback observed in the fall of 2008, when bank credit risks resulted in an increase of sovereign funding costs, when governments committed to support their banking sectors. in assessing this evidence, we should keep in mind that the limited market liquidity characterising some cds markets suggests particular caution in interpreting cross - country developments in cds premia on government bonds. these relationships clearly deserve further analysis and they underscore the important interactions between the government and corporate sectors across the euro area countries despite the high degree of financial integration in the euro

through self imposed regulation or self discipline. how can a bank change the incentive structure underlying its remuneration scheme if the others are not and – more importantly – if unregulated institutions like hedge funds are cannibalising them? how can boards improve their knowledge of what management is doing if they have little understanding of the complexity of financial instruments? there is clearly a coordination problem, i. e. a role for public policy. financial institutions would generally oppose constraints that reduce their profitability, but would ultimately accept them if the constraints are imposed on all. the bottom line is my starting line. the main problem with financial markets comes from conflicts of interest, at all levels. the problem with conflicts of interest is that those that are affected by them do not recognise them, sometimes not even in private ( i myself as a central banker might not be immune from this sense of denial ). experience has shown that self discipline and self regulation are not sufficient. there must be constraints and obligations, not only for individuals but also for institutions. if we really want to overhaul the financial system so that it can face the challenges of the future, we have to recognise this and act accordingly. in a global financial system, such an action requires a strong european initiative.