a deflationary economy. one possible example was the japanese economy in 1995, when there were concerns about a deflationary spiral. this line of thinking leads to the conclusion that ensuring price stability means maintaining a situation in which firms and households need not be concerned about a continuing rise or fall in prices in the future when planning their investment and consumption. 2. the relationship between price stability and the economy having defined price stability, there may still be questions about the relationship between price stability and other important policy objectives or economic variables. for example, should we not care about the economy and economic growth as long as prices remain stable? what is the relationship between prices and foreign exchange rates or asset prices? first, with regard to the relationship between prices and the economy, it is true that in the short term, it seems as if higher economic growth could be realized if a certain level of price increase were allowed. however, it has recently been proved both theoretically and empirically that this effect will only be temporary. if such a process is repeated, the economy may well fall into an intractable situation of stagflation, in which the economy falls back into a recession but high inflation remains. this was the economic disease that plagued the industrialized countries of europe and the united states from the mid - 1970s to the early 1980s. in the light of that experience, there is a common understanding today that price stability is a precondition for sustainable economic growth. second, how are foreign exchange rates and asset prices to be considered in the context of monetary policy management? they are important factors that require due attention. however, if their stability is made a direct objective of monetary policy, the stability of the domestic economy and of prices in general may be undermined. this is because land prices and exchange rates reflect certain factors which prices in general do not. specifically, land prices incorporate changes in the productivity of land and in the expected rate of return. exchange rates, in the long term, are adjusted by the market mechanism in accordance with the differentials between domestic and overseas inflation rates, or in other words, changes in the purchasing power parities. any attempt to control such factors forcibly through macroeconomic policies will most likely cause distortions in other sectors of the economy. needless to say, fluctuations in exchange rates and asset prices will affect the economy in various ways. it has been a valuable lesson of the bubble economy that significant fluctuations in asset prices may be a sign of some irregularities in economic activity or excessive

to contain real - estate bubbles. • the eba is charged with the task of harmonizing supervisory practices. it has the legal competence to develop and monitor the implementation of the single rule book. the establishment of the single supervisory mechanism ( ssm ) is the second main element of the banking union. • contrary to the single rule book the institutional framework in the banking union will only cover a subset of eu member states – the euro area countries and the countries opting in. • as the name implies, the ssm will be a unitary supervisory system, composed of national competent authorities and the ecb – and close cooperation between them – and with the possibility of non - euro area member states to participate. • the ecb will assume direct supervisory responsibility and major decision making powers for significant banks meeting certain criteria. we expect the number of banks falling under direct ecb supervision to reach some 130 – 140. • i will return to the subject of the ssm in a moment. bis central bankers ’ speeches the third element of the banking union is the single resolution mechanism ( srm ). • the single resolution mechanism is needed to coordinate and direct the resolution policies of the member states, in particular of institutions whose failure would have cross - border implications. • an important precondition for the srm is a swift adoption of the bank recovery and resolution directive ( brr ), as it lays out a harmonised toolbox enabling the orderly resolution of even a systemically important institution. the single supervisory mechanism the ssm will operate as a system, gathering all of the expertise of national supervisors and at the same time possessing a strong decision - making centre. • appropriate decentralisation procedures are being planned, while preserving the unity of the supervisory system and avoiding duplication. • the justification for the two - tier system is that the local supervisors will have an information advantage with respect to local banks. the centralized decision making is required to address cross - border issues and to minimize the risk of excessive forbearance on the part of local supervisors. • the shared competence is important also because credit cycles differ nationally and the associated potential problems need to be mitigated through nationally differentiated ways. the ssm, with the ecb at its centre, is entrusted with an extensive set of micro - and macroprudential powers, covering all key tasks relating to the prudential supervision of credit institutions. the ssm will possess early intervention powers according to the draft bank recovery and resolution directive. the early