euro area works largely through banks. during recent years, about three quarters of firms ’ external financing have come from that source. this means that any impairment in the bank lending channel will have stronger consequences in the euro area than in other economies where firms ’ external financing comes largely from corporate bond markets. banks in the euro area have recently come under pressure both as regards their capital bases and their funding conditions. the plan to strengthen their capital bases is an attempt to reinforce their standing in financial markets, but this is not an easy process. there are essentially three options for banks to bis central bankers ’ speeches pursue to raise their capital ratios as demanded by the european banking authority : they can raise their capital levels, sell assets or reduce their provision of credit to the real economy. the first option is much better than the second, and the second option is much better than the third. but raising capital levels is expensive in a depressed market and faces resistance from shareholders. selling assets is less preferable and curtailing credit to the real economy is even worse. therefore, public authorities ought to cushion the impact on the real economy and banks should consider restraining dividends and ad hoc compensation to strengthen buffers. banks are also facing problems in raising longer - term funding in financial markets. the resulting shortening of their funding leads in turn to maturity mismatches on balance sheets of the kind that caused the financial crisis. at the same time, shortages of collateral are beginning to emerge in some segments of the financial system especially for the small and medium sized banks. in addition to identifying these particular strains in the banking sector, our regular economic and monetary analysis has indicated that the intensified financial market tensions continue to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks. in such an environment, cost, wage and price pressures in the euro area should remain modest over the policy - relevant horizon. at the same time, the underlying pace of monetary expansion remains subdued. in these conditions, and faithful to our mandate to maintain price stability over the medium term, the ecb ’ s governing council has taken a number of far - reaching decisions. the council decided to reduce its key interest rates by another 25 basis points to 1 %. in normal financial market conditions, a policy rate reduction is a potent instrument of inflation control and demand support. the rate cut works its way through a long chain of downward adjustments in financial returns. at the end of the process, the yield on large spectrum of

all those decisions that have been taken to put the euro area economy back on course. the monetary policy measures taken last week by the ecb ’ s governing council will support the flow of credit to firms and households in the euro area economy. ludwig erhard faced a situation that was much more difficult than what we face today. still, he was able to look through the challenging present and to work hard to build a future that he never doubted would be brighter. the european policy makers might well be inspired by his style : “ den strom der zeit konnen wir zwar nicht lenken, aber wir werden unser schiff sicher steuern. ” thank you very much for your attention. bis central bankers ’ speeches