domestic banks. the average price - to - book ratio of large and complex banking groups in the euro area, for instance, is currently only 0. 5, which implies that investors think banks are overvaluing their assets, will not meet their required rates of return, or will require new capital. and trust tends to be lower in some jurisdictions than others, creating fragmentation, as shown by certain banks ’ lack of access to market funding. how will banking union help restore confidence across countries? in general, we hope that the ssm will bring about a regime change in supervision and increase trust by creating more stable banks. but this is more a forward - looking consideration. the immediate challenge is to address the concerns about banks ’ balance sheets that are already there. and this is why the ecb is putting a great deal of importance on the balance sheet assessment we are required to conduct for those banks that we will directly supervise. the methodology for this assessment is currently being designed and we want it to be rigorous. we also expect to use external consultants to ensure a credible exercise. it is essential for us that at the end of the assessment we have a clear picture of the real situation in the sector – both to allay market concerns, and to be able do our job properly as supervisor. i will not go into greater detail at this stage on the methodology or timing, as many decisions can only be made when the ssm regulation is approved by the european parliament and the ssm ’ s supervisory board is appointed. but let me add one qualification : the exercise may reveal capital shortfalls, and we need to know how they will be filled. without solid backstops in place, i fear markets will not see the exercise as credible as they will expect the results to be fudged. while i am pleased that the european council in june acknowledged this issue, it called for backstops to be in place before the assessment is completed, which bis central bankers ’ speeches leaves too much room for uncertainty. backstops need to be in place before the assessment has begun. put simply, if there are no backstops, there will be no assessment. if as we hope the parliament adopts the regulation at its plenary session on 9 – 11 september, the supervisory board should be established as soon as possible, and we have to overcome bureaucratic hurdles. if it takes until the first quarter of next year to have the full - fledged supervisory board in place it will be quite challenging to have the ssm

excluded from bail - in should be well - defined upfront, with limited discretion to take into account financial stability and macroeconomic concerns. but the council agreement allows considerably more discretion for national resolution authorities. this creates a possibility for those authorities to exclude certain creditor classes due to national political economy concerns, creating uncertainty for investors about how bail - in will in fact be applied. to ensure consistency in the single market, in my view only two options for applying the resolution framework are really possible. either we have national resolution authorities taking decisions with very limited discretion ; or we have a central resolution authority taking decisions with some discretion. i see the current agreement – decentralisation plus discretion – as the wrong combination. bis central bankers ’ speeches one solution to this, at least for countries that participate in the ssm, is the creation of the single resolution mechanism ( srm ) to centralise resolution decision - making. the commission recently released its proposal for such a mechanism based on art. 114 tfeu, and the ecb supports the main elements of this proposal. in particular, it meets what we consider to be the three essential requirements for a credible srm : a single system, a single authority, and a single resolution fund. and we strongly support the timeline put forward by the commission, which would see the srm entering into force in january 2015. on the key issue of how the srm takes decisions, we support the commission ’ s idea to establish a central resolution board based on majority voting. to be effective in dealing with cross - border banks, and to be consistent across different countries, the resolution authority must be able to make independent decisions in the european interest, and this is not possible if national vetoes remain. we agree with the commission that all this can be achieved without a change to the treaty. this generally positive assessment notwithstanding, there are some areas where we think the proposal could still be improved. first, in our view, determining when a bank is failing or likely to fail should be the sole competence of the supervisor. under the current proposal, the commission can also decide to trigger resolution on its own initiative. we think that the new system should have a clear allocation of responsibilities. second, we disagree with the proposal to put a voting member of the ecb in the board of the srm. it is better to maintain a clear functional separation between supervision and resolution and avoid potential conflicts of interest. third, the state aid framework is important in defining common parameters for national