shareholders cannot be expected to discipline risk - taking by a bank. there are a number of reasons for this. in addition to the fact that individual shareholders are often small and scattered, they only have limited ways of exerting pressure on management, short of disposing of their share. importantly, the reality of limited liability seriously biases shareholders ’ perspective on risk. while shareholders benefit from the upside of risk - taking, they are not symmetrically penalised on the the focus here is placed on a typical banking institution, but other financial institutions might be similarly affected. bis central bankers ’ speeches downside. this asymmetry is particularly acute in the case of highly levered institutions. for these institutions, the return on equity in good times is high, say above 20 %. the trade - off between high returns if the risky gamble pays off, and zero, if it does not, is particularly lopsided. both limited liability and the natural highly leveraged nature of banking thus come with a natural propensity for socially excessive risk - taking on the part of banks ’ owners. in this sense, shareholders cannot be relied upon to impose on managers the socially optimal level of risktaking. 4 managers what about the bank ’ s managers? here theory tells us that, apart from reputation and other soft considerations, the behaviour of managers will crucially depend on the link between their remuneration and the firm ’ s performance. what is at issue here is less the level of managerial remuneration. more important is the relationship between the remuneration and the medium to long - run performance of the bank. clearly, a managerial remuneration scheme which depends exclusively on the bank ’ s current performance places managers in a situation similar to limited - liability shareholders. they cash in on lucky gambles but bear few of the negative consequences of unlucky ones. unless we are willing to question the notion of limited liability for managers ( as does kotlikoff, 2010, for example ), this kind of consideration provides the rationale for regulating managerial remuneration, and in particular for imposing long waiting periods before managers can cash in bonuses. 5 a very careful design of managerial payment structure is needed if we want to ensure that the risk decisions of self - interested managers are in line with the longterm interest of firm owners and society. 6 bondholders let me now turn to the issue of whether bondholders – the final stakeholder group – contribute to a balanced weighting of risk

do not come from unfounded fears of a break - up of the euro, but from the consequences of changes in other factors, such as energy and food prices, relative price adjustment in stressed countries, exchange rate behaviour, weak demand and high unemployment. nonetheless, those threats are real and to cope with them the governing council is determined to keep the monetary policy stance accommodative for an extended period of time. moreover, the governing council is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation. we are strongly determined to safeguard the firm anchoring of inflation expectations over the medium to long term. bis central bankers ’ speeches the lesson i draw from the fragmentation we have experienced is that the cohesion of the union is in the fundamental interest of all of its members. if it is called into question, as we have experienced first - hand, the consequences cannot be anticipated with total certainty, but they are detrimental to all. it is therefore of considerable relevance and importance that europe has already made extensive progress in strengthening its rules, for example through the fiscal compact. what is essential now is that these rules are enforced. to unwind the consolidation that has been achieved, and in doing so to divest the rules of credibility, would be self - defeating for all countries, for three reasons. first, the high level of indebtedness in almost all euro area countries implies a higher vulnerability to market pressure and contagion, if the euro area faces further economic or financial shocks. the higher the level of debt, the greater the probability of falling into a bad equilibrium, where high rates lead to defaults. second, if fiscal rules are applied by national governments to achieve not only stability but also sustainable growth, they do not in my view clash with national ownership of the budget. fiscal rules should be viewed in the national debate as promoting growth - friendly fiscal consolidation and not simply as a painful accounting exercise. third, respecting the rules matters because it is a prerequisite for any other form of integration. it is only by demonstrating a willingness to fulfil their commitments that member states can achieve the degree of mutual trust that is a pre - requisite of integration in other areas. indeed, any pooling of sovereignty requires a great amount of mutual confidence, in particular in the fiscal area, which is traditionally seen as a prerogative of national parliaments. structural policies within a monetary union