euro area, the crisis also revealed that the institutional framework of our economic and monetary union – in which the ecb is the central bank tasked with ensuring price stability – needs to be strengthened. the heads of state or government have therefore embarked on reforms of euro area governance, including, for instance, the fiscal framework governing member states ’ fiscal policies with a view to enhancing fiscal discipline. they have also embarked on the creation of a banking union that will centralise critical functions relating to the banking sector at the european level, thereby severing the direct link between sovereigns and their banking sectors that proved to be an achilles heel during the crisis. following the necessary political decisions, the ecb has now started building a banking supervisory function that will be responsible for the direct supervision of around 130 systemically relevant banks in the euro area, as well as for the indirect supervision of banks that are not considered systemically relevant. the ecb will assume this role in november next year and will implement the new harmonised model together with the national competent authorities, whether central banks or non - central bank supervisors. we call this the single supervisory mechanism ( ssm ). this also has implications for eu candidate countries and potential candidates in the western balkans, including serbia, given the role of banks headquartered in the euro area in the banking sectors of the region. the establishment of the ssm implies that for many foreign - owned banks operating in serbia, the ecb will become the “ home ” supervisor and they will no longer be supervised by different national supervisors depending on where they have their headquarters. in addition to enhancing the quality of the supervision of parent banks, the ssm has the potential to facilitate home - host country cooperation in banking supervision – thereby strengthening the relationship between the ecb and the national bank of serbia in this area as well. in parallel, work is underway on a bank bis central bankers ’ speeches recovery and resolution regime, which in our view is a crucial component in severing the link between sovereigns and banks and will be a complement to the ssm. an immediate priority in the euro area is to repair the balance sheets of commercial banks, where necessary. the ecb is conducting a comprehensive analysis of bank balance sheets before assuming the supervisory responsibility and we have made it clear on many occasions that we need to have a european recovery and resolution regime in place by the time the ssm assumes its responsibilities. turning to serbia again, recent developments show that similar challenges apply to the serbian financial sector, where

the continuing impact of our past monetary policy tightening on consumer prices should help this process. while market - based indicators of inflation compensation have largely reversed the declines observed in the autumn, most measures of longer - term inflation expectations continue to stand at around 2 per cent. risk assessment the risks to economic growth remain tilted to the downside. greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy. lower confidence could prevent consumption and investment from recovering as fast as expected. this could be amplified by geopolitical risks, such as russia's unjustified war against ukraine and the tragic conflict in the middle east, which 2 / 4 bis - central bankers'speeches could disrupt energy supplies and further weigh on global trade. growth could also be lower if the lagged effects of monetary policy tightening last longer than expected. it could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster. inflation could turn out higher if wages or profits increase by more than expected. upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade. moreover, extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected. by contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand by more than expected, or if the economic environment in the rest of the world worsens unexpectedly. greater friction in global trade would make the euro area inflation outlook more uncertain. financial and monetary conditions market interest rates in the euro area have risen since our december meeting, partly mirroring higher rates in global financial markets. while financing conditions remain tight, our interest rate cuts are gradually making it less expensive for firms and households to borrow. the average interest rate on new loans to firms declined to 4. 5 per cent in november, while the cost of issuing market - based debt remained at 3. 6 per cent. the average rate on new mortgages edged down to 3. 5 per cent. growth in bank lending to firms rose to 1. 5 per cent in december, up from 1. 0 per cent in november, amid a strong monthly flow. growth in debt securities issued by firms moderated to 3. 2 per cent in annual terms. mortgage lending continued to rise gradually but remained muted overall,