country ’ s growth rate, investors share both the upside and the downside risk of a country ’ s economic development. that way, a country can potentially retain fiscal space even when faced with adverse economic events. gdp - linked bonds exhibit equity - like features, which of course gives rise to questions as well. how would a financial system cope with the fact that sovereign debt would cease to exist as a “ safe asset ”? how many investors would be interested in gdp - linked bonds and, leading on from there, how would a gdp - linked bond be priced? these are the questions that need to be answered before gdp - linked bonds can ever become a widespread vehicle for transferring fiscal risks – upside as well as downside ones – to private investors. but it is an avenue worth exploring. limiting fiscal risks, however, should be the first line of defence. an effective mechanism to achieve this aim would be to pursue a sound fiscal policy. this would also help to plug a constant source of uncertainty, at least in the euro area. as eickmeier, metiu and prieto3 show, this might help to increase the effectiveness of monetary policy as well. when uncertainty is reduced, actors behave in a less risk - averse manner, which heightens responsiveness to monetary policy impulses. the benefits of pursuing sound policies in a particular area are therefore not confined to that area, but extend to other policy areas as well. triggering a virtuous cycle of sound monetary, fiscal and financial policies therefore seems like the surest and fastest way to resolve the conundrum the euro area faces right now. korte, j, and s steffen ( 2014 ), “ zero risk contagion – banks ’ sovereign exposure and sovereign risk spillovers ”, working paper. sandra eickmeier, norbert metiu and esteban prieto ( 2016 ), “ time - varying volatility, financial intermediation and monetary policy ”, iwh discussion papers no. 19 / 2016. bis central bankers ’ speeches the euro area still has a long way to go, especially with regard to fiscal policy. unfortunately, the spill - over from monetary policy – savings through lower interest expenses – has not been used as much as it could to press ahead with improving public budgets. 4. conclusion ladies and gentlemen macroeconomic stability is multidimensional, and this is essentially what this year ’ s spring conference seeks to capture. while sound policies have to be pursued in each

institutions. the construction of efficient risk - monitoring and risk - management systems in the banks is of paramount importance in this connection. recent turmoils caused by banks ’ involvement in risky investments of hedge funds show that the necessity to further strengthen the risk management of financial institutions is high on the agenda. in this context, supervision performs an initiator function by prescribing certain standards which improve market discipline and the sense of responsibility. in germany, for instance, appropriate minimum standards for the merchandise trading of banks were laid down in a publication by the federal banking supervisory office. conversely, banks sometimes take the initiative themselves, as was found when riskmanagement models for gauging market - price risks were being developed. in that case, supervisors have to ensure quality control by linking market standards with conditions of their own. this strengthening of market players ’ sense of responsibility and self - discipline acknowledges the market ’ s role as a “ complementary banking supervisor ” which supplements traditional supervision in a useful manner. global players are of outstanding importance in this context. with regard to their influence on the stability of the financial markets they should be well aware of their systemic responsibility. in view of the current crisis in the financial markets of several countries the international debate on the extent to which traditional banking supervision can be replaced by a model of much more self - regulation by market participants has lost some of its original attractiveness. it is precisely in the area of systemic risk that the gravest weakness of selfregulation proposals lies : they generally ignore the connection between the right to lay down risk containment standards and the responsibility for preventing systemic risks. thus, a shifting to the institutions themselves of the authority to lay down the law is called for without this being accompanied to the same extent by a shifting to the private sector of the responsibility for coping with systemic risks. but, in my opinion, stronger self - regulation would entail the assumption of the responsibility for avoiding systemic risks and therefore the establishment of extensive safety nets by banks for coping with problem cases on their own responsibility. the safeguarding package quickly set up by international investment banks for the american hedge fund ltcm last month is a positive step in this regard. hopefully it can also be seen as a sign of a growing readiness of banks to create a liquidity - safeguarding fund on a permanent basis. vi however, mitigating systemic risks would be better than transferring them to a newly created fund. increased transparency could make a major contribution to that. after all, greater transparency enhance