ii entails significant transition costs for both banks and supervisors. however, even in the absence of basel ii, well managed financial institutions would have continued to update and improve their it systems and risk management practices simply to keep pace with the evolving marketplace. basel ii has pushed firms further than they may have gone on their own. in addition, basel ii confers other benefits, including greater operational efficiencies, better capital allocation and greater shareholder value through the use of improved risk models and reporting capabilities. one might reasonably expect such improvements to lead to more consistent profits and reduced volatility of credit losses as a result of consistent risk spreading, more effective deployment of capital, and the ability to make better business decisions. conclusion i would like to close by reiterating the importance of basel ii in support of financial resiliency, especially in this age of rapid change and innovation. basel ii encourages better measurement and management of risk exposures and the treatment of complex financial instruments. it seeks to advance the practice of stress testing as well as other risk management techniques. under pillar 2, banks take the lead in developing internal risk management processes that support robust estimates of regulatory and economic capital. through enhanced transparency and market discipline, pillar 3 will become more important because of increasing intermediation of risk through the capital markets. both banks and supervisors need to take a long - term perspective when considering the benefits of basel ii. regulatory capital, risk management and risk - based supervision are aligned in a more consistent manner that can accommodate financial innovation. this capital framework is a long - term investment that if done properly will lay the foundation for further evolution. it is through strong coordination among supervisors and with you – the industry – that we can realise the full potential of the basel ii framework. thank you.

over the last year. moreover, low longer - term interest rates increase the market value of financial assets held by banks. this, in turn, results in capital gains that further support bank profitability. this aggregate picture masks some heterogeneity within the banking sector. in particular, depending on their business models, individual banks might be affected in different ways by the low interest rate environment. a second issue is the potential risk of credit or asset bubbles. currently, we do not see compelling evidence at the euro area level of stretched asset valuations. both corporate bond spreads and equity prices appear to be broadly in line with fundamentals. similarly, real estate price growth remains moderate in the area as a whole, although significant cross - country heterogeneity is observable. this assessment is corroborated by the fact that credit growth is still modest, which suggests that asset price developments are not accompanied by increasing leverage. nevertheless, the longer the accommodative measures need to be kept in place, the greater the risks of unwarranted side effects on the financial system become. for instance, asset prices may increase to levels that are not in line with fundamentals because investors might be tempted to take on more risk during times of low yields. such developments are best addressed by enacting appropriate macro and micro prudential policies. while our single monetary policy is geared towards delivering price stability for the euro area as a whole, macroprudential policy measures can be designed to address financial stability risks that may be building up in specific market segments, jurisdictions or individual countries. addressing potential risks at their origin also reduces the probability of contagion throughout the euro area. microprudential policies also help to reduce vulnerabilities in banks. i therefore welcome the european commission ’ s risk reduction proposals presented last november, which further develop the eu ’ s legal framework for credit institutions and should increase the resilience of banks. conclusion let me conclude. as i argued last week in ljubljana, and as the crisis has shown, the benefits of the single currency can only be fully reaped if we have policies and institutions at national and european level that ensure it works for everyone. in the run - up to the launch of the euro, there was a strong commitment to advancing along the path of institutional and economic convergence. the crisis showed that this commitment cannot be relaxed. in fact, it remains fully relevant today as we seek to strengthen emu and the