- performing loans. this is ultimately all about, in particular, giving banks greater incentive to be more risk - aware in their decision - making processes than they were prior to the outbreak of the crisis. for that to work, it has to be ensured that institutions with riskier business models also pay higher risk premiums. this, however, also requires investors to be correspondingly aware of risk in their own actions. and a decisive factor here is that banks, in a pinch, need to be permitted to fail – without bringing the financial system to its knees – and that investors and creditors, and not the tax payer, need to 3 / 9 bis central bankers'speeches be first in line to pick up the tab for banks ’ losses. these factors are what make the new european rules for bank resolution, and their rigorous application, so important. amidst all the contentious debate, recent events have shown, at least, that banks are now able to exit the market without jeopardising the functional viability of the financial system. but in order not to thwart these rules, the eurosystem has to return, over the long term, to a way of providing liquidity that is more in line with market conditions. the pre - crisis monetary policy framework had some merits in that respect. banks obtained liquidity from the eurosystem on terms that were not significantly more favourable than those on the interbank market. if central bank loans, which are not priced according to the credit institutions ’ financial standing, are significantly more favourable than funding via the money market, the banks will have few incentives to lower their risk premiums by means of an appropriate risk management. that also applies to longer - term refinancing operations. interest rates for longer - term refinancing not being set by the market weakens banks ’ inherent responsibility for their own liquidity and credit risk management. furthermore, it distorts competition because institutions that do not have a sustainable business model can obtain funding from the eurosystem over the long term irrespective of the risk involved – and do so, moreover, with collateral of lower quality than collateral on the interbank market. 3. government bond purchases ladies and gentlemen in the crisis, not only did the eurosystem switch to full allotment of liquidity as well as expanding the collateral framework, it also launched purchase programmes for government bonds. as early as may 2010, greek sovereign bonds were being purchased under the securities markets programme. to

it also reduced the rating threshold for certain types of monetary policy collateral, thereby giving banks greater scope for taking out eurosystem refinancing loans. the central banks of the eurosystem – like those elsewhere in the world – thus took on, to a major extent, the money market ’ s role as an intermediary during the crisis. by acting as a lender of last resort to banks, they were able to contain the threat of massive bank runs. this approach becomes a problem, however, once the ample provision of central bank money goes from being used to bridge temporary liquidity shortfalls to helping keep banks without a sustainable business model afloat permanently. those institutions will then tend to prolong their loans to legacy customers so as not to have to take a potential financial loss. however, they will subsequently also grant fewer new loans. this means that funding remains with less productive firms instead of being channelled towards more innovative firms. the situation in japan should serve as a warning in this respect. 3 weak banks therefore tend to foster weak firms – and the attendant inefficient distribution of funding will dampen an economy ’ s innovativeness and dynamism. studies by the oecd4 confirm that a non - negligible percentage of firms can be classified as “ zombie firms ". for instance, in 2013 28 % of capital resources in greece, 19 % in italy and 16 % in spain were sunk in firms that were unable to cover their cost of capital. economists fabiano schivardi, enrico sette and guido tabellini 5 show how the health of the banking system influences capital allocation. they estimate that credit misallocation in italy reduced annual gdp growth by between 0. 2 and 0. 35 percentage point in the 2008 to 2013 period. what we see, therefore, is that providing liquidity is a balancing act for central banks. not providing enough liquidity could cause a spark to turn into a fire, while providing too much liquidity, and thus keeping “ zombie banks ” on life support, could cause the foundation of our competitive economic system to become brittle and shaky. this dilemma cannot be resolved by monetary policy on its own. it is therefore important for banks to be sufficiently capitalised so as, for instance, to be able to cope with credit losses. for that reason, it is a good thing that banks now need to hold more and better - quality capital. they are also required to continue to shrink their holdings of non