causes of the current sovereign debt crisis are unsustainable fiscal policies, i want to emphasise that this calls for a clear strengthening of incentives for prudent and sustainable fiscal policies. the introduction of common bonds in the euro area would, however, clearly weaken such incentives without offering a long - term crisis resolution. let me give you three main reasons for that : firstly, the fact that financial markets demand higher yields to fund governments with weak fundamentals clearly provides the right incentives for governments to ensure sustainable finances. credible fiscal consolidation and prudent levels of government debt are in general rewarded, whereas large budget deficits and mounting government debt are penalized in the form of high credit risk premiums. eurobonds would eliminate this incentive mechanism as governments would face the same funding costs regardless of the state of their public finances. secondly, the introduction of eurobonds would also not lead to lowering the costs of the current sovereign debt crisis ; it would simply redistribute them. common euro area bonds imply a transfer from countries with solid public finances – as they will no longer benefit from lower funding costs – to those with weak ones. unsustainable fiscal positions can no longer be punished by high credit risk premiums. this redistribution aggravates exiting moral hazard problems and undermines the long - term fiscal sustainability in the euro area. on top of this, via common bonds strong and weak countries enter into mutual obligations of very large size. this carries the risk that the sound countries will be taken hostage, e. g. to accept a gradual erosion of commonly agreed fiscal rules. thirdly, it is not clear at all whether an introduction of eurobonds would really help to resolve the sovereign debt crises. part of the government debt in the euro area would of course be converted into common euro area bonds. the remaining part will, however, still need to be funded the old - fashioned way – by means of standard sovereign bonds. whether financial market participants would be willing to buy and hold sovereign bonds of countries with weak fundaments is by far not sure, also given the current level of risk aversion. in an extreme case, we might see a complete flight out of individual sovereign bonds towards eurobonds, which would rather lead to a worsening of the sovereign debt crisis and not to its resolution. eurobonds do not offer a solution of the sovereign debt crisis and are not a viable instrument of government financing. maybe it is worth remembering that all the

risks that a bank poses to its stakeholders and the financial system. this will enable them to deal with risks at an early stage. but if the rulebook becomes too extensive and too detailed, supervision turns into a simple boxticking exercise. a large, detailed and seemingly comprehensive set of rules would make supervisors less flexible and effective ; it would leave no room for discretion. supervisors would no longer be able to react quickly to newly emerging risks in an ever - changing banking sector. they would be walled in by rules that were devised to cover every possible situation but, in reality, were outdated right from the start. so, looking ahead, we must fight the urge to make the rulebook ever more detailed. but don ’ t get me wrong – we shouldn ’ t unwind any of the reforms. what has been done was necessary. but we should be cautious about going too far. a few clear principles can be more effective than 1, 000 complex rules. the two pillars of regulation and supervision are equally important and we should not favour one at the other ’ s expense. and this brings us to the third pillar of a stable banking sector : market discipline. with all this talk about rules and supervision, we must not forget that banks operate in a market economy. so why not use market forces to keep risks in check? there is nothing like the prospect of failure and financial loss to keep a lid on risk - taking. and this, as a general rule, is the essence of market discipline. investors who stand to lose their own money will be more cautious than investors who can offload losses onto someone else. but, as i said earlier, markets have not always exerted discipline. during the crisis, bank failures were rare. but why? well, first, there was a lack of tools to resolve failing banks – particularly across borders. and second, there were fears of contagion and a meltdown of the entire financial system. so, in the end, governments often stepped in and propped up failing banks with public funds. there was no chance for the market to impose discipline. this has changed. in europe, we now have a single resolution mechanism for banks. it was designed to ensure that banks can fail in an orderly manner without damaging the financial system. this new mechanism has recently passed its first series of tests. generally speaking, it was successful, although some adjustments are still needed. 3 / 4 bis central bankers'speeches in any case, we have taken a big step towards