- round effects such as the risk of a persistent upward shift in inflation expectations. at the same time, we are carefully monitoring the smooth transmission of our monetary policy stance throughout the euro area. the lasting vulnerabilities caused by the pandemic still pose a risk in this regard. therefore, we also decided to continue applying flexibility in reinvesting redemptions coming due in the pandemic emergency purchase programme ( pepp ) portfolio. moreover, our new transmission protection instrument ( tpi ) is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries. financial stability in the euro area turning to the impact on the financial sector, overall financial stability conditions have deteriorated this year. rising inflation and the worsened economic outlook in combination with tighter financing conditions are aggravating pre - existing vulnerabilities in both the non - financial and non - bank financial sectors – while in the banking sector profitability is, at least partly, supported by higher interest rates. financial markets are vulnerable to changes in expectations about growth and inflation, as well as to changes in the monetary policy outlook. tighter financial conditions have already resulted in a significant market correction in the first half of the year amid rising cross - asset correlations, notably between equity and bonds, two segments in which investors suffered the largest losses. some market segments are still pricing in rapidly declining inflation and a mild growth slowdown, an assessment which could turn out to be too benign. in addition, investors do not expect the growth slowdown to significantly challenge corporate solvency or profitability. over the next 12 months, corporate earnings are still expected to grow, while speculative - grade default rates are forecasted to pick up only slightly. but euro area corporates are facing continued headwinds from high input prices, higher borrowing costs and lower sales. industrial producer price inflation in the euro area exceeded 40 % in june. the resulting margin squeezes could limit firms ’ debt servicing capacity, particularly in the case of firms that are highly indebted and are still suffering from the repercussions of the pandemic. moreover, high input costs affect production, especially for manufacturing firms, whose heavy reliance on natural gas makes them more vulnerable to high energy prices. higher inflation is also squeezing households ’ disposable income. families have to divert a larger fraction of their income towards everyday consumption, reducing their debt servicing capacity. as lowincome households all

part of our reflections on the future of macroprudential policy after the covid - 19 pandemic. these challenges relate to the creation of what we call “ macroprudential space ” and to the complementarities between monetary policy and macroprudential policy in a monetary and banking union. as i will argue, addressing these two challenges will increase the effectiveness of the macroprudential framework and strengthen the resilience of the euro area banking sector to major unexpected shocks in the future. macroprudential space the experience of the initial phase of the pandemic illustrated the importance of having sufficient releasable capital buffers in the banking sector. when the pandemic struck in early 2020, macroprudential authorities in the euro area had little room for manoeuvre to release macroprudential capital buffers. only seven euro area countries ( including the three home countries of my fellow panel members ) had enacted or announced a countercyclical capital buffer requirement above zero. in the euro area banking sector as a whole, countercyclical 1 / 3 bis central bankers'speeches capital buffer requirements accounted for only 0. 2 % of risk - weighted assets at the end of 2019. by contrast, structural buffer requirements, comprising the capital conservation buffer, systemic risk buffers and buffers for systemically important institutions, stood at 3. 4 %. unlike the countercyclical capital buffer, structural buffers were in principle not designed to be releasable. but, unlike minimum requirements, buffers are there to absorb unexpected losses and to help sustain lending under stress conditions. in short, the fact that only a tiny fraction of capital buffers has been explicitly releasable limited the macro - financial stabilisation function of macroprudential policy. banks ’ reluctance to dip into their existing buffers seems to be driven by a desire to avoid market stigma and to keep some distance from the threshold for automatic restrictions on distributions. this could be an area of concern at the system - wide level, given that recent empirical evidence of bank behaviour during the pandemic suggests that banks are less active in maintaining credit supply if they operate close to the combined buffer requirement. a contraction of the credit supply could compromise the recovery and increase the risks to financial stability. recent research by ecb staff further suggests that having higher countercyclical capital buffers at the onset of the pandemic, which could have been released during the current crisis, would