iii liquidity requirements. 3. increased risk aversion. this scenario investigates the risks arising from a global unwinding of the search for yield. it assumes an abrupt increase in investor risk aversion worldwide, which results in stock price declines and a marked increase in corporate bond spreads, thereby raising interest rates in the more risky market segments. this would trigger a recession in the united states with negative implications for the global economic outlook. the details of these scenarios and the underlying methodologies are discussed in detail in the latest ecb financial stability review from may 2013. just let me say that they are designed to account for a number of transmission channels and the size of the shock is based on historical evidence. ( chart 5 ) the scenarios generate a rich set of results, but let me focus on the implications for bank capital. under the baseline scenario, the core tier 1 capitalisation of euro area large and complex banking groups would increase from 11. 2 % in the fourth quarter of 2012 to 11. 3 % by the end of 2014. certainly, with regard to the findings of the adverse scenarios, they crucially depend on the implementation details of the individual scenarios. nevertheless, we observe that a scenario configuration involving a rise in interest rates and asset price declines would in general tend to exert a negative influence on banks ’ solvency positions. this being said, the decline in the large and complex banking groups core tier 1 capital ratios under the adverse scenarios is found to be relatively mild, which is a sign of resilience among the largest euro area banks also reflecting significant capital raising efforts in recent years. specifically, the average core tier 1 capital ratio would decline by 0. 4 percentage points in the funding stress scenario, by 0. 6 in the sovereign debt crisis scenario and by 1. 1 in the global risk aversion scenario. however, the average numbers mask some dispersion across euro area countries. bis central bankers ’ speeches this analysis is focused on the banking sector. the situation in the euro area insurance sector differs somewhat. insurance companies are also to some extent exposed to risks from shifts in sovereign bond yields and global risk aversion. forward - looking analysis of the assets and liabilities of the euro area insurance sector indicates that the impact of these risks would remain limited due to comfortable capital buffers. for the euro area insurance sector, low yields on highly rated government bonds can constitute a solvency risk in the medium term. this holds in particular for those jurisdictions where a market

, monetary policy shocks appear to account for a significant proportion of variation in risk aversion. see hoerova m., bekaert g., lo duca m., 2013, risk, uncertainty and monetary policy, journal of monetary economics, forthcoming. bis central bankers ’ speeches of course, under certain circumstances, reducing the market price of risk and freeing up the risk - taking capacity of financial institutions is actually an outcome desired by monetary policy. consider, for instance, the various non - standard monetary policies undertaken globally after the financial crisis broke out in 2009. they were designed to remove risk from balance sheets so as to avoid destructive fire sales and at the same time to enable banks to continue providing credit to the real economy by taking new risks. the concern is, however, that persistent liquidity sows the seeds for market turmoil. unexpected events such as a shift in monetary policy or a change in economic growth prospects will inevitably affect the yield curve. since banks carry out maturity transformation by borrowing short and lending long, and there are limits to their ability to hedge against interest rate risk, the result could well be an abrupt unwinding of risk - taking positions, putting financial market under renewed stress. these risks are further exacerbated by the fact that banks operating under asymmetric information and limited liability will tend to take more risk than is socially optimal, since they do not internalise the losses they may eventually impose on taxpayers. a clear and consistent framework for bank recovery and resolution, including “ bail - in ” rules with a clear pecking order and limited exemptions, will be conducive to a stricter monitoring of risks by bank creditors. in fact, as i mentioned before, many of the most severe financial crisis since the great depression broke out after prolonged periods of exceptionally easy monetary conditions. apart from the 2009 financial crisis, similar developments occurred in relation to the burst of the new economy bubble in 2001, the collapse of ltcm in 1998, and the burst of the bond market bubble in 1994. search for yield in bond markets let me now turn to the current situation by showing you some evidence on the search for yield in the euro area, taking corporate bond markets as an example. ( chart 1 ) let me start with some recent developments in european bond markets. since early 2012, we have seen pronounced shifts towards bond holdings in investment funds and a general decline in yields across all risk categories. as chart 1 shows, equity holdings of euro area investment funds