systemic financial crisis : unprecedented when measured by financial losses and fiscal costs ; unprecedented when measured by its geographical reach ; and also unprecedented when measured by the collapse in worldwide trade, economic output and financial activity. we were on the brink of a global financial meltdown. the ensuing “ great recession ” hit the euro area hard due to its high economic openness and financial exposures to a bank financed system. 1 it triggered the euro area ’ s sovereign debt crisis, for which several distinct root causes were to blame. as tony judt put it, we saw : “ uncertainty elevated to paroxysms of collective fear – which had corroded the confidence and institutions of liberalism. ” today i have two messages. the first is that banks mirror their environment, but also contribute to shaping it in many respects. over long periods of time the soundness and credit see also : shambaugh, j. c. ( 2012 ), “ the euro ’ s three crises ”, brookings papers on economic activity, spring. and schoenmaker, d. ( 2011 ), “ the financial trilemma ”, economic letters, 111 ( 2011 ), pp. 57 – 59. bis central bankers ’ speeches standing of banks depends on good governance, shrewd planning, and their spirit of initiative. but, it also hinges on the dynamism of the economy, the sustainability of public and private finances, and the coherence of emu ’ s architecture and political economy. sound banking regulation and supervision are also key : prevention must be the first line of defence. however, if adverse shocks hit or bank failures arise, there needs to be an effective crisismanagement and resolution framework with credible backstops. several of these elements were either weak or altogether missing in europe and in member states with a strong banking presence. at the same time, monetary union needs banking union because sound banks are an essential complement to sound money. banks are the main transmission channel of monetary policy to the real economy. the second message is that there were important similarities between banking developments and the evolution of the crisis across the atlantic. but there were also relevant differences. the crisis is now practically over in the us and other parts of the world, whereas it is only slowly tapering off in the euro area. to understand how a european banking union can succeed we need to understand how we are now addressing all root causes of the sovereign debt crisis across countries and completing emu ’ s architecture. 2 i will

banks ; and • finally, the ecb, can decide to exercise supervisory powers directly. we are facing a huge logistical challenge. there is a vast amount of preparatory work which has to be ready 12 months after the regulation enters into force, including : selecting highly skilled staff ; drawing up the final list of significant banks to be directly supervised by the ecb ; harmonising supervisory approaches and reporting requirements ; mapping the euro area banking system ; developing a supervisory manual and publishing a framework regulation within six months after public consultation. these tasks are already completed by around ninety per cent. the next big challenge is the design and undertaking of the asset quality review ( aqr ). the comprehensive balance sheet assessment is essential for ensuring that the ssm gets off to a good start and avoids reputational damage stemming from the possible emergence of problem banks in the early days of operation. it is like a due diligence before the actual start of the banking union. it consists of a risk assessment which will be the basis of aqr, and the aqr will flow into a stress test to be jointly taken with eba. all three elements must be completed before the ssm becomes operational. together they will allow a comprehensive view of banks ’ balance sheets, bringing together quantitative and qualitative aspects of banks ’ outstanding risk. which risks? risks already present, or ones that may emerge over time. the aqr should therefore be a rather static, point - in - time exercise according to rigorous standards on all aspects of asset quality and with an emphasis on the level of provisions. more forward looking assessments could then be provided in the baseline scenario of the stress test. for us, this is an exercise on an unprecedented scale, and we will also call on external experts to enhance its credibility. about the ssm : second part – accountability and independence the ssm regulation provides a clear separation between monetary policy and supervisory tasks, the latter entrusted to the newly established supervisory board. this organisational separation is necessary to comply the increased accountability requirements of the supervisory function and still respect the independence of the monetary policy function. the governing council ’ s deliberations on supervisory matters will be strictly separated, including separate agendas and meetings. the ssm will also have its own accountability framework vis - a - vis the european parliament, the eurogroup and national parliaments. it will apply to the chair of the ssm ’ s supervisory board of the ssm, and not to the ecb ’ s president