increasingly relevant in our assessment of price stability. the risk of deflation, which would make deleveraging harder, is quite limited. but the longer inflation remains low, the higher the probability of such risks emerging. that is why the ecb has been preparing additional non - standard monetary policy measures to guard against such a contingency and why it stands ready to take further decisive action if needed, mr draghi said. * * * ladies and gentlemen, let me start by expressing how grateful i am, but also how humbled i feel, to speak before you today as the recipient of the schumpeter preis. it would be tempting to see the honour that you are bestowing upon me today as a reward for a job well done. i prefer, however, to regard it as encouragement and inspiration to continue to pursue our task with the determination and single - mindedness that we have shown over the past few years. bis central bankers ’ speeches after five years of crisis and uncertainty, 2012 and 2013 have been years of stabilisation for the euro area. they have seen a return of confidence in the prospects of our union. 2014 and 2015 will be a period of recovery. but that recovery remains conditional. it remains conditional on our pursuing the very policies that have brought about the return of confidence : growth - friendly fiscal consolidation ; structural reforms aimed at enhancing investment and productivity ; a committed monetary policy guarding against all threats to the integrity of our money – in particular, the risk of both too high and, currently more relevant, too low inflation. but the recovery is also conditional on another set of policies, to which it is appropriate that i devote my remarks tonight, because those policies draw significantly on the teachings and ideas of joseph schumpeter. i refer here to the actions being undertaken to “ reboot ” the financial system, in particular the so - called comprehensive assessment, the current health check of the euro area banking system, which precedes the start of the single supervisory mechanism ( ssm ) in november this year. the rationale for what we are doing actually connects two of schumpeter ’ s most important and better known insights. first, it acknowledges the importance of a well - functioning financial sector for the efficient allocation of capital and credit. and second, it contributes to the schumpeterian notion of “ creative destruction ” which drives innovation and productivity growth. in short, by “ cleaning up ” and repairing bank balance sheets, we are creating the

, while restraining leverage capabilities of the unregulated / lightly regulated entities. in our case, it proved to be an effective combination since banks ’ exposure to such entities could be regulated through absolute exposure norms or even tweaking the risk weights applicable to such exposures. i realize the problem would be much more involved in predominantly market based financial systems where direct bank linkages are not very obvious. but even in such regimes, as has been clearly demonstrated, the indirect linkages of banks were enmeshed in the maze. that is why it would be important to ensure that the markets too should not provide leverage capabilities to such entities beyond a limit. contingency liquidity provision the recent crisis has again brought to the fore the role of a lender of last resort ( lolr ), the extent of central bank intervention and the entities to which such intervention can be extended. the question as to under what circumstances and to what extent should safety nets be extended to non - deposit taking institutions has been widely debated. the basic underpinning of the lolr philosophy internationally has been that any institution whose failure is conclusively decided to cause broader systemic instability needs to be supported in the interregnum. as long as banks were the only institutions fulfilling this criterion, the case was straightforward. however, with the development of global financial markets and growth on non - banks as alternate media of financial intermediation, the decisions were not so simple as the recent experience has clearly shown. in india, while there is no provision for the reserve bank of india to lend directly to any nonbank entities, except a few specified ones, there have been specific instances of workable arrangements being devised in the interest of broader stability to provide liquidity support to some institutions / sectors indirectly. in respect of non - banking finance companies, in the postlehman fallout there was severe systemic liquidity crunch and even the non - banking finance sector were stressed. it was apprehended that in a scenario of asymmetrical information and general risk aversion of banks, the strains in non - banking finance sector could eventually pose a systemic risk. it was then decided to provide liquidity to those systemically important nbfcs facing temporary liquidity mismatches through an spv. the key part was that the liquidity was provided to the spv by the rbi through purchase of fully government guaranteed bonds. further, this facility was only meant to tide over temporary liquidity mismatches and not