), with some common rules applicable to individual countries. in its first incarnation, the stability and growth pact focused almost exclusively on fiscal sustainability, with little emphasis on fiscal stabilisation. 5 in recent years it has undergone several reforms, some of them with the explicit aim of providing greater prominence to stabilisation considerations, both at the country level and at the euro area level. the result has been rules which are now viewed as complex and opaque, with little evidence that they have delivered a more countercyclical fiscal policy stance in the euro area. 6 the stability and growth pact has limited flexibility and does not lend itself to incorporating areawide stabilisation elements. national fiscal rules, with a focus on domestic issues, tend to neglect positive cross - border spillovers. they fail to recognise the benefits of cross - country risksharing and the vital role played by the public sector in underpinning it. in other words, rules based purely at a national level, or even rules that coordinate a fiscal stance across countries, are not enough by themselves. empirical evidence suggests that spillovers from a fiscal expansion in one euro area country to others are positive, but small. so while it is important for those countries with available fiscal space to use it domestically to support overall stabilisation, a central fiscal capacity with the ability to allocate expenditure across countries would be more powerful. a dedicated centralised fiscal capacity would not interfere with domestic policy. by focusing on common area - wide stabilisation it need not affect national fiscal space but rather provide an additional layer. this focus would also help ensure that areas of expenditure that are vital for long - run growth are not cut during a downturn, helping to preserve future fiscal space and support real interest rates over the long term. a central fiscal capacity of this sort would clearly need to be carefully designed to mitigate any risk of moral hazard. but, crucially, it should have sufficient firepower to effectively contribute to macroeconomic stabilisation. it needs to be sizeable and agile enough to react rapidly to emerging threats. but macroeconomic stabilisation in the euro area can only function properly when other emu features and institutions are adequately designed and operational. first, the banking union needs to be completed. unified banking supervision and the single resolution fund ( srf ) have provided greater confidence that banks operating in other euro area countries face the same conditions as in their home market. but the banking union will remain incomplete until a common deposit insurance scheme

negative relation between economic growth rates and non - performing loans. 18 these positive effects are present at all rate levels and are likely to dominate when rates are moderately negative. also, the economic lower bound is not uniquely determined at the aggregate level, since it will vary across banks and markets. the larger the share of floating - rate lending in the stock of loans, the faster the negative impact on interest margins will be. banks with large fixedincome holdings and holdings of bonds which benefited the most from spread compression will be better able to offset decreases in interest margins, due to the revaluation effect i mentioned earlier. the reversal rate is also likely to be lower for those banks that are more reliant on wholesale rather than retail funding. market - based funding suffers less from this zero lower bound, meaning that these banks will be better able to protect their interest margin. similarly, banks with greater market power will be better able to avoid passing on the lower rates to borrowers, which will shield their interest margin. in the euro area, this translates into geographic differences based on national banking structures, implying that the negative interest rate policy has distributional consequences across banks located in different jurisdictions. the second important question for central bankers is whether the persistence of low and / or negative interest rates poses other challenges to the stability of the financial system. challenges to financial stability could potentially materialise if banks were to increase their exposure to lower quality counterparties in order to boost returns. 19 this could reflect a portfolio rebalancing towards riskier assets when yields on safe assets are low, or a greater concentration of lending to small and medium - sized enterprises ( smes ), which generate higher returns but have historically exhibited higher default risk. the effect is similar to the “ search for yield ” by managers targeting a minimum return on assets. 20 note that this mechanism may as well apply to shadow banks insofar as they rely on short - term funding. financial stability risks could also materialise outside of banks, through excessively inflated financial asset prices and if zero or negative rates encourage asset price volatility. existing empirical evidence, mainly relying on periods with low, but positive rates before the global financial crisis, indicates that periods of lower interest rates are indeed associated with see adrian, t., and h. s. shin ( 2011 ), “ financial intermediaries and monetary economics ”, in b. friedman and m. woodford ( eds. ), handbook of monetary economics, volume 3,