monetary union is not viable in the absence of a banking union. more recently, with the recovery in the euro area still fragile, new geopolitical tensions have led to an unprecedented refugee crisis and increased uncertainty. finally, matters such as the consequences of brexit, different approaches among member states regarding banking union, and the slow progress in establishing a single european deposit insurance scheme, have been hindering further progress in securing the financial system architecture needed to enhance stability. ssm has been the catalyst for the banking union of the eu. it provides a framework for common rules and policies across the euro area banking sectors ; it enhances single supervisory treatment over segmented national practices. but it also has to cope with increased uncertainty in two areas : the possibility of major changes in the future regulatory framework and the way that new regulation is going to be applied. bis central bankers ’ speeches

against unexpected losses. sufficient capital also decreases the likelihood of a bank becoming insolvent and limits - via loss absorption and greater public confidence - the adverse effects of bank failures. and by providing an incentive to exercise discipline in risk - taking, capital can mitigate moral hazard and thus protect depositors and deposit insurance. admittedly, high capital adequacy ratios do not guarantee a bank ’ s soundness, particularly if the risks being taken are high or the bank is being mismanaged. therefore, supervisors consider a bank ’ s capital adequacy in the context of a host of factors. but the bottom line is that capital is an important indicator of a bank ’ s condition, also for financial markets, and minimum capital requirements are one of the essential supervisory instruments. guiding principles 7. therefore, it should be absolutely clear that, when it assesses the treatment of credit risk, the basle committee has no intention whatsoever of reducing overall capital adequacy requirements, maybe even the contrary. higher capital requirements could prove necessary, for example, for bank loans to higher - risk countries. in fact, this has been publicly recognized by bank representatives in view of the recent asian crisis. more generally, we should be aware of the potential instability that can result from increased competition among banks in the united states and european countries in the longer run. and we should not be misled by the favourable financial results that banks are presently showing, but keep in mind that bad banking times can - and will - at some point return. in those circumstances, credit risk will turn out to be inflexible, difficult to manage and undoubtedly the primary source of banks ’ losses. absorption of such losses will require the availability of capital. a reduction of capital standards would definitely not be the right signal from supervisors to the industry, nor would it be expedient. 8. of course, i am aware of the effects of capital standards on the competitiveness of banks as compared to largely unregulated non - bank financial institutions, like the mutual funds and finance companies in the united states. admittedly, this is a difficult issue. on the one hand, too stringent capital requirements for banks would impair their ability to compete in specific lending activities. on the other hand, capital standards should not per se be at the level implicitly allowed for by market forces. competition by its very nature brings prices down, but, alas, not the risks. if competitive pressures were to er