in 2013 alone, partly in anticipation of the assessment. increasing robustness has been mirrored in banks ’ share prices, which increased by around 40 % in 2013 relative to average market growth of 20 %. over time, i expect this process, together with the new regulatory framework which is now being completed by the basel committee, to result in a euro area banking system with a more streamlined balance sheet structure and higher levels of capital. we should be wary of situations where bank assets are many multiples of gdp, as we saw in countries like ireland and cyprus before the crisis. bail - in ability will likely also mean that senior unsecured bank debt plays a lesser role in the future relative to deposits. in other words, this will be a banking system that comes closer to its traditional role of taking deposits and making loans. however, a permanent shrinking of the banking system raises some questions about how finance will be intermediated in the euro area. if intermediation between savings and investment is taking place less through banks, then it must take place elsewhere, through capital markets. capital markets are already increasingly complementing banks in the euro area : as bank credit to corporates has fallen, it has been approximately matched by issuance of corporate bonds. however, the substitution is not perfect, in particular for smaller firms, for which it is more costly for investors to obtain adequate information. this means that, absent policy action, smes are at risk of losing some access to finance. if we are to continue with a consistent set of steps to support the recovery, cleaning up the banking system therefore has to be accompanied by policies to facilitate the development of capital markets, especially for smaller firms. it is for this reason that we have frequently highlighted the importance of creating conditions that support capital market deepening, including by removing regulatory obstacles to the least risky models of securitisation. moving towards a sustained recovery this “ rebooting ” of the financial system, together with the construction of the banking union, had to be the first step in a consistent strategy, as a healthy banking system is a necessity for a sustained recovery. yet it is still only an enabling factor. what it achieves, essentially, is bis central bankers ’ speeches to create an environment where “ normal ” macroeconomic management can resume. it is this that generates the recovery. the banking sector supports this process through two channels. first, it facilitates the ability of monetary policy to maintain price stability and help economic growth return to its potential. second

and the references therein. a closely related debate is whether default is costly or not for sovereigns in the long term ( see for example e. borenzstein and u. panizza, “ the cost of sovereign default, ” imf working paper 08 / 238 ; and m. aguiar and g. gopinath, “ defaultable debt, interest rates and the current account, ” journal of international economics, 2006 ). the case for public intervention when markets collapse has been made in the light of the recent financial crisis in p. bolton, t. santos and j. scheinkman, “ outside and inside liquidity, ” quarterly journal of economics, 2011 ; f. heider, m. hoerova and c. holthausen, “ liquidity hoarding and interbank market spreads : the role of counterparty risk, ” european central bank working paper 1126, 2009. for public intervention in form of asset purchases, see j. tirole, “ overcoming adverse selection : how public intervention can restore market functioning, ” american economic review, 2012 ; and t. philippon and v. skreta, “ efficient interventions in markets with adverse selection, ” american economic review, 2012. see d. diamond and p. dybvig, “ bank runs, deposit insurance, and liquidity ”, journal of political economy, 1983. in fact, it is optimal for ex - ante efficiency to expose banks to liquidity risk, see c. calomiris and c. kahn, “ the role of demandable debt in structuring optimal banking arrangements, ” american economic review, bis central bankers ’ speeches of last resort, but to perform that function at a penalty rate, illustrates both the need for ( liquidity ) insurance and the need to safeguard incentives. in the words of bagehot : “ if the banks are bad, they will certainly continue bad and will probably become worse if the government sustains and encourages them. ” the art of central banking is the art of balancing ex - ante and ex - post efficiency. 3. omts and committing to partial insurance the purpose of the omts is to establish a backstop in the event of negative self - fulfilling market dynamics. we designed this new programme with features that are in line with an efficient trade - off between insurance and incentives. the first feature is to provide effective insurance against redenomination risk. under certain conditions, the ecb stands