the mere size and growth of the financial sector. instead, we must ensure that the financial sector fulfils its intermediation role and processes information efficiently. microprudential regulations that improve banks ’ risk assessment and ensure the application of common rules are crucial in this regard. the bis central bankers ’ speeches banking union is a key step forward, because it specifically aims at establishing common supervisory standards in europe. second, macroprudential policy is a necessary complement to microprudential regulation. there might be risks to the stability of the entire financial system that microprudential supervision cannot detect. for instance, increasing household debt might threaten stability through its impact on consumption – while individual banks may remain sound. third, post - crisis private sector deleveraging was much lower in the euro area than in the us. this could partly explain the slower economic recovery in europe. reducing debt to levels which do not threaten stability requires efficient mechanisms to deal with distressed financial institutions. bank recovery and resolution regimes provide important tools to restructure banks ’ balance sheets. this is where the second pillar of the banking union – the single resolution mechanism – plays a key role. through the bail - in tool it facilitates, most importantly, increased private sector risk sharing. fourth, the banking union needs to be complemented by reforms that strengthen the development and integration of equity markets. the capital markets union offers a great opportunity. many initiatives that are currently being discussed aim at integrating european markets for debt instruments, such as securitisations or covered bonds. the capital markets union can indeed contribute to an improved functioning of debt markets. to facilitate debt restructuring, reforms of insolvency regimes are needed in some countries. the goal should be to allow for quick recovery or liquidation in a predictable and transparent manner. yet, the capital markets union ought to put more emphasis on the development and integration of european equity markets. improving access to venture capital, and the sharing of information on local markets can be important in this regard. the capital markets union should also be taken as an opportunity to remove the preferential tax treatment of debt versus equity. these measures would strengthen banks ’ and firms ’ loss - absorbing equity buffers and stabilise growth in europe. bis central bankers ’ speeches

is something worth avoiding if possible. rapid portfolio runoff could also make it more likely that bank reserves become scarce unexpectedly or more quickly than policymakers had anticipated. finally, overly fast portfolio runoff could introduce undesired noise into financial conditions. this could complicate policymakers ’ economic forecasting and make it more challenging to determine and communicate the appropriate monetary policy stance. predictability predictability complements gradualism by promoting stability in market estimates for the future size of the balance sheet, and confidence that the fomc will not unintentionally create market stress. it involves assuring the public that the flow of balance sheet reduction remains gradual across a range of economic scenarios, including ones quite different from our central forecast. achieving predictability is complicated by uncertainty about agency mbs principal repayments, an issue i ’ ll summarize briefly. to an extent, unexpected changes in the pace of existing home sales contribute to uncertainty about mbs repayments. but by far the greatest source of aggregate uncertainty relates to refinancing. when homeowners get a new mortgage with a better interest rate, and pay off their 4 / 7 bis central bankers'speeches old higher rate one in the process, existing agency mbs are paid off more quickly, and replaced with greater issuance of newly - minted agency mbs containing the new, lower - rate loans. the benefit of the fomc ’ s redemption cap is that it limits the pace at which securities will flow back into private hands under scenarios in which interest rates fall much more than expected. to illustrate this, projections for agency mbs repayments under a scenario of lower interest rates are shown in panel 3 — as you can see, in this low rate scenario, the caps would still be exceeded even when fully phased in. by providing market participants some certainty that the pace of balance sheet decline will be gradual across economic scenarios, this plan should help mitigate the risk of unexpectedly sharp shifts in asset prices, liquidity, or market functioning should markets begin to put greater weight on lower interest rate scenarios. indeed, by promoting greater confidence in the stability and liquidity of the treasury and agency mbs markets across economic outcomes, the fomc ’ s plan should result in lower risk and liquidity premia on these assets, relative to normalization plans that do not promote such confidence. being prepared for the unexpected while i am confident that the fomc ’ s plan will work well, there ’ s always the risk that