credit risk. so far, however, credit risks have not increased. in addition, risks may also be lurking in the non - bank sector. in light of potential systemic risks emanating from them, the macroprudential framework for non - bank financial institutions needs to be enhanced. both banks and non - banks may be facing additional headwinds in future. higher interest rates will eventually cool the economy, possibly leading to higher credit risks. moreover, one can already see signs of a reversal of the overvaluation of assets observed both in real estate and in the stock market ( slide 18 ). lessons for the future : when can separation work? let me conclude by drawing some lessons regarding the conditions under which the separation principle can work. the ecb has a clear mandate of price stability. since financial stability is a precondition for price stability, and vice versa, we need to take financial stability into account in our monetary policy deliberations. in fact, central banks have an important role to play as lenders of last resort to deal with liquidity crises and stabilise financial markets at times of self - reinforcing dynamics. such interventions do not create a conflict with price stability in the presence of a deflationary shock, as shown by the pepp episode. but even if liquidity crises occur in high - inflation periods, tools can be designed in a smart way to ensure separation. this requires that the tools are targeted and temporary, and that the underlying issue is truly one of liquidity rather than solvency. monetary policymakers cannot address solvency issues, which are clearly in the realm of fiscal authorities. in fact, by doing so, they would risk overstepping their mandate and endangering their independence. governments and supervisors are therefore essential to enable monetary policymakers to focus on their primary mandate of price stability. a sound financial regulation and supervision are the best protection against financial dominance, just as a functioning fiscal framework is needed to protect against fiscal dominance. this speaks in favour of maintaining or strengthening macroprudential capital buffers, being cautious on profit distributions and share buy - backs, and closing regulatory gaps, including by fully implementing the basel iii reforms. taking financial stability into account is not just about market stabilisation. to ensure the proportionality of their monetary policy decisions, central banks need to consider potential side effects regarding the buildup of financial stability risks, even if those risks may materialise only in future. during the years of low

peter praet : the state of the global economy speech by mr peter praet, member of the executive board of the european central bank, at the 4th world policy conference, vienna, 9 december 2011. * * * i would like to thank for john hutchinson and arnaud mehl for their contributions in the preparation of this speech. ladies and gentlemen, it is a real pleasure to be here in vienna to exchange views on the future of global governance. vienna is certainly a city with a long tradition of discussing issues with a global dimension. following my invitation to speak at this conference, i remembered that, almost 200 years ago, it was here that the famous congress of vienna attempted to forge what came to be known as the “ concert of europe ”. this marked the creation of a new global order and a major turning point in world history. the global economy today is also at a turning point. what we have been observing since the unprecedented financial market tensions in mid - 2007, is not merely the unfolding of a global financial and economic crisis. we have been observing the emergence of a new global order, which is occurring at a faster pace than was anticipated prior to the crisis. the exact form this new world will take is unclear. but the need for sound global governance, which we will discuss today and tomorrow, is becoming ever more apparent. on the economic front, several important changes have already occurred. the g20 has replaced the g7 as prime forum for international economic cooperation. the financial stability board has been established to address vulnerabilities and develop regulatory and supervisory policies conducive to global financial stability. bodies based at the bank for international settlements in basel, which are of keen interest to the central banking community, have also been reformed and their membership enlarged to relevant emerging market players. in assessing the state of the global economy today, i would like to emphasise that we are at a crossroads. in this respect, i would like to make three specific points. firstly, i will describe the outlook and risks for the global economy and euro area. i will then discuss the interplay between the current prospects and key policy challenges : namely global real and financial imbalances as well as liquidity and capital flow volatility. finally, i will briefly comment on major governance challenges in the eurozone. * let me commence by depicting how i see the outlook and key risks for the global economy and euro area at this juncture. against a background of heightened uncertainty