##cies into account. what is a treasure trove for researchers – the host of questions surrounding the functioning of the new set of instruments – is tricky terrain for policymakers, and for central bankers in particular. shedding light on the use and effectiveness of different macroprudential instruments therefore remains an eminent task of economic research, and i am positive this conference will provide a valuable contribution. does this mean that monetary policymakers can ignore the financial stability implications of their actions? i don ’ t think so. while i am not in favour of a dual monetary policy mandate, i am convinced that monetary policy cannot stand on the sidelines when financial imbalances build up. first, we cannot be sure that macroprudential policies will eliminate financial imbalances. the experience with macroprudential instruments is still limited, and the toolkit is still incomplete. second, the crisis has vividly demonstrated how financial instability affects inflation developments and the capacity of the central bank to safeguard price stability. therefore, monetary policy would be wise to take the implications of financial imbalances for price stability into account. as a first line of defence, however, it is financial regulation that has to bear the brunt of the financial stability burden. with regard to traditional microprudential regulation, the direction for reform seems clear : realigning risk and reward in a way that sets incentives for sustainable action. privatising gains and socialising losses is not only socially corrosive : it also produces bad economic results, as financial actors are encouraged to take on excessive risks. a cornerstone of the international efforts to ensure the resolvability of systemic banks is the standard for bail - in debt, the so called total loss absorbing capacity ( tlac ). it requires those banks to hold a minimum of debt that can absorb losses in the case of a bank resolution. this shields the taxpayer from footing the bill. europe already has a bail - in standard of its own, the so called minimum requirements on eligible liabilities ( mrel ). for efficiency and financial stability purposes, one could argue that tlac and mrel should be as similar as justifiable. systemically relevant banks pose a special challenge when it comes to resolving them without creating substantial repercussions for the wider financial system. for that reason, the single resolution fund exists. when resolving a systemic bank, the single resolution board, which is the relevant european authority, can draw on the resources of this fund – but

only after at least 8 % of the banks ’ liabilities have been bailed in. it seems therefore sensible that mrel for systemically important banks is guided by this threshold. when it comes to bailing in creditors, the fear of contagion is probably the most important reason for refraining from doing so. naturally, contagion risk is high when the creditors who are to be bailed in are banks themselves. currently, the mrel standards do not discourage banks from holding another institution ’ s bail - in debt. in the interests of financial stability, this has to change. bis central bankers ’ speeches 3. fiscal and financial policy the importance of realigning risk and return has come to the fore with regard to yet another issue : the research of todd walker and of sascha steffen and joseph korte2 – both works will be presented at this conference – are examples of a growing body of scientific evidence that the zero - risk weighting of sovereign debt distorts capital allocation and therefore acts as a drag on growth. the absence of exposure limits also encourages loading up on sovereign debt, potentially creating cluster risks that can pose a threat to financial stability as well. the research is there ; what is needed now are political results. the regulation of sovereign exposures is under discussion at both the european and the basel level. and while progress at both levels is desirable, it is particularly urgent in the euro area. in contrast to other jurisdictions, the eurosystem is forbidden to act as a lender of last resort for governments. such a function would be tantamount to mutualising sovereign risk, which would be incompatible with the decentralised maastricht framework. the risk profile of euroarea sovereign debt is therefore different. doing away with sovereign debt as a cluster risk would also pave the way for the orderly restructuring of sovereign debt. if necessary, an orderly restructuring would be possible without endangering the stability of the overall financial system – and this would be good not only for euro - area countries but for other countries, too. in this case, financial risks would be borne by those who took them : the private investors. but an orderly restructuring of sovereign debt is not the only way in which financial market participants can be involved in bearing fiscal risks in a structured way. a recent initiative by the bank of england is pushing for the introduction of standardised gdp - linked bonds. by tying coupon payments, and potentially the principal as well, to a