the sector is engaged in maturity transformation the same way as banks are. it was the proneness of banks to deposit runs that led the u. s. regulators, back in 1930s, to introduce deposit insurance to mitigate that risk. what we now witness is the emergence of the shadow banking sector that is also vulnerable to runs. shadow banks do not hold deposits and are mostly funded via equity. however, they are subject to the short - term redemption risk. if, for any reason, shadow banks experience substantial redemptions, they may be forced to promptly sell assets to fulfil their obligations, which may give rise to fire sales. this is particularly worrisome, since 98 % of almost 95 thousand non - money market investment funds operating in the euro area in 2014 are open - ended funds, which means that the investors can redeem their shares in the funds at any time. moreover, the funds ’ buffer of liquid assets that can absorb the equivalent of a run on shadow banks has dropped in recent years increasing the illiquidity risks. the risks stemming from the shadow banking sector are sometimes understated on the ground that potential losses would be suffered by equity holders, who should be aware of the risks they are taking. the systemic risk arising from the shadow banking sector cannot be easily ring - fenced. this is because of the interconnectedness of shadow banks with the regulated part of the financial system. stress in the shadow banking sector can be transmitted to the banks both through direct and indirect channels : banks ’ exposures to shadow banks through equity investments, credit claims or liquidity lines. credit claims are often related to prime brokerage services allowing de facto non - bank financial institutions to increase their leverage. undrawn liquidity lines can also be activated once the redemption risk materialises. banks also rely on funding received from shadow banks, which often invest in bank debt securities or provide liquidity through repo transactions or through provision of collateral. more importantly, stress in the shadow banking could be propagated through financial markets via common exposures to assets. the price of those assets would be depressed in the case of a run on shadow banks, in an extreme case leading to a fire sale. it is important to protect the border between shadow and non - shadow banks, which implies that a macro - prudential regulator could introduce large exposures limits on exposures of regulated institutions to shadow banks. similarly, we could introduce margin requirements for repo transaction with shadow banks.

), with some common rules applicable to individual countries. in its first incarnation, the stability and growth pact focused almost exclusively on fiscal sustainability, with little emphasis on fiscal stabilisation. 5 in recent years it has undergone several reforms, some of them with the explicit aim of providing greater prominence to stabilisation considerations, both at the country level and at the euro area level. the result has been rules which are now viewed as complex and opaque, with little evidence that they have delivered a more countercyclical fiscal policy stance in the euro area. 6 the stability and growth pact has limited flexibility and does not lend itself to incorporating areawide stabilisation elements. national fiscal rules, with a focus on domestic issues, tend to neglect positive cross - border spillovers. they fail to recognise the benefits of cross - country risksharing and the vital role played by the public sector in underpinning it. in other words, rules based purely at a national level, or even rules that coordinate a fiscal stance across countries, are not enough by themselves. empirical evidence suggests that spillovers from a fiscal expansion in one euro area country to others are positive, but small. so while it is important for those countries with available fiscal space to use it domestically to support overall stabilisation, a central fiscal capacity with the ability to allocate expenditure across countries would be more powerful. a dedicated centralised fiscal capacity would not interfere with domestic policy. by focusing on common area - wide stabilisation it need not affect national fiscal space but rather provide an additional layer. this focus would also help ensure that areas of expenditure that are vital for long - run growth are not cut during a downturn, helping to preserve future fiscal space and support real interest rates over the long term. a central fiscal capacity of this sort would clearly need to be carefully designed to mitigate any risk of moral hazard. but, crucially, it should have sufficient firepower to effectively contribute to macroeconomic stabilisation. it needs to be sizeable and agile enough to react rapidly to emerging threats. but macroeconomic stabilisation in the euro area can only function properly when other emu features and institutions are adequately designed and operational. first, the banking union needs to be completed. unified banking supervision and the single resolution fund ( srf ) have provided greater confidence that banks operating in other euro area countries face the same conditions as in their home market. but the banking union will remain incomplete until a common deposit insurance scheme