lead to a competitive advantage in the internal market. equally, banks in these countries have a greater potential to increase their profitability. to avoid such national fragmentation, eu - level initiatives that support the recovery play a very important role. at the same time, deteriorating economic conditions may give rise to debt sustainability concerns in the medium term, notably in countries with already limited fiscal space. the increase in public debt levels, while necessary today, needs to be managed in the medium term. the shape and strength of the recovery are uncertain and this uncertainty will persist for some time. there are substantial downside risks, in particular if the easing of containment measures turns out to be premature or their impact on productive capacity is more persistent. macroprudential policy can play an important role in safeguarding the resilience of the system and supporting the recovery. regulatory capital buffers were designed to be used, or drawn down, in periods of stress. banks that use their buffers are acting in line with the intended functioning of the framework and in accordance with authorities ’ expectations. by using buffers now and avoiding excessive deleveraging that would be harmful for the economy, banks help reduce losses later. turning to non - banks, european - wide supervision of capital markets and a macroprudential framework for the sector is needed. this would help mitigate system - wide liquidity risks, reduce the sector ’ s vulnerability to turbulence in financial markets, and thereby reduce the need for ex post policy interventions. a resilient financial system is essential to support the recovery, address inevitable pressure on bank profitability and reduce overall vulnerability to market volatility. accelerating progress towards the capital markets union remains a priority, as does completing the banking union. this would help ensure access to funding for a wide range of firms, support a level playing field and counter fragmentation along the path to recovery. 4 / 4 bis central bankers'speeches

access to the capital markets during a protracted phase of low interest rates to retain profits with a view to strengthening their capital base, if necessary. furthermore, banking supervisors from bafin and the bundesbank will be keeping a watchful eye on those institutions that were revealed in the survey to be particularly vulnerable with respect to the low - interest - rate environment. in addition to general as well as country and institution - specific strains that have made themselves increasingly felt, a key regulatory change came into force on 1 january 2016 that likely had an impact on banks ’ funding costs. i am talking here about the important and absolutely vital regime shift from a bail - out regime to a bail - in regime. if a bank fails in future, shareholders and certain creditors will henceforth be systematically called upon to foot a greater share of the resulting bill. this is the right course of action as it ensures that risks are borne by the investors who ultimately also took the risks. the new regime reduces the incentives for banks to take excessive risks and then pass them on to taxpayers – the taxpayers now represent the last line of defence rather than the first. however, this has also caused the interest rates on debt instruments that are eligible for bail - bis central bankers ’ speeches in to rise. the fact that the prices of these instruments, known as cocos, have contracted across the board – irrespective of whether they were issued in core countries or crisis - hit countries – is a sign that banks in europe are now clearly judged less based on the solvency of their home country. and that sums up the aim of banking union perfectly. if the outlook for the banks is to be improved, the process of overhauling basel iii also needs to be brought to a swift close this year. first, the revised framework will provide banks with greater stability. much has already been achieved in this regard, as i have already pointed out. second, the regulatory debate should not become a source of uncertainty in and of itself. financial institutions need to be able to adapt to the new regulatory regime, and they require a reliable basis for planning to make this happen. this will also quash market uncertainty over regulatory requirements, as the financial strains associated with regulatory change are then easier to calculate. 4. the state of play in germany yet for all the challenges facing the banking sector, we should not lose sight of the fact that the german economy is in good shape overall. that ’ s allowing domestic banks to keep their risk provisioning low,