specifically discarding good assets while keeping distressed assets in the banking book and recording them at close to nominal values. this method can rapidly turn a bank into a “ bad bank ” that does little to support credit creation. these last two types of deleveraging can have significant real economy effects. financially weak banks tend to roll over unprofitable loans that do not support growth – which is why they have sometimes been dubbed “ zombie banks ”. 2 there is in fact some evidence that such evergreening practices have appeared in the euro area as well in the last few years. 3 the wrong type of deleveraging also has a further effect, which i want to concentrate on today : it harms the transmission of monetary policy. given the bank - based nature of our financial system, the main channel through which the ecb ’ s monetary policy impulse reaches the real economy is through bank lending rates. and this is particularly important for smaller borrowers, as they cannot easily substitute bank financing for capital market financing such as corporate bond issuance, as larger borrowers have been able to. but banks that are deleveraging through a prolonged process of retaining earnings and rolling - over bad loans tend to block this channel. regardless of the level of nominal interest rates, they are likely to demand higher compensation for new exposures that increase riskweighted assets, including notably loans to non - financial firms. and if they are competing for new deposits to improve their loan - to - deposit ratios, they will face higher funding costs, which then have to be incorporated into the interest rate spread for new loans. all this means that monetary policy starts to lose traction. http : / / www. economist. com / blogs / freeexchange / 2012 / 05 / deleveraging see, for example, albertazzi, u. and m. bottero ( 2014 ), “ the procyclicality of foreign bank lending : evidence from the global financial crisis ”. journal of international economics, forthcoming. although the identification of “ evergreening ” practices is challenging, a large number of analyses have been conducted on this issue looking at japan ’ s “ lost decade ”. see, among others, caballero, r., t. hoshi and a. k. kashyap ( 2008 ), “ zombie lending and depressed restructuring in japan ”. american economic review, vol. 98, no. 5. one more recent study looks at the global financial crisis and identifies lending patterns consistent

sector to accelerate the development of alternative, capital market - based sources of finance, especially for smaller firms. we are already seeing this playing out in some jurisdictions – for example, the “ mini bonds ” scheme in italy – and through initiatives, which the ecb supports, to revive european abs markets. this matters for monetary policy for two reasons. first, it provides a spare tyre, i. e. an additional channel through which monetary policy can be transmitted if the bank lending channel becomes impaired again in the future. second, it reduces banks ’ market power, bis central bankers ’ speeches which may tend to make bank lending rates more responsive to monetary policy. indeed, recent research has shown that where banks in europe face limited competition, and firms depend on them, financing constraints for smes have been found to be higher. 5 such a rebalancing of the financing mix of the euro area economy probably requires further regulatory action to acknowledge the emergence of new, high - quality capital market instruments, such as simpler and more transparent abss. conclusion let me conclude. depending on how it materialises, bank deleveraging has a potential to impede the recovery and make it more difficult for central banks to engineer an appropriate degree of monetary accommodation or, to the contrary, to support the transmission of monetary policy. therefore, policy - makers need to set proper incentives to promote “ good ” deleveraging and to steer clear of “ bad ” or “ ugly ” deleveraging. monetary policy has a vital role to play here, notably by providing the necessary liquidity support. but ultimately, it is up to policy - makers in other domains to ensure that the banking system is restored to health, and becomes fit for supporting the recovery and the reallocation of production factors in the euro area. here, the steps being taken towards a banking union and the comprehensive assessment of banks ’ balance sheets are crucial. they will establish the conditions necessary for a transparent, competitive and stable banking sector. and they will help monetary policy to regain traction across the euro area. one final remark : for all this to work, the banking union needs to be complete. we need not only a single supervisory mechanism, but also a single resolution mechanism ( srm ) and single resolution fund ( srf ) and, at a later stage, a single deposit insurance scheme. if we fail to establish the srm and srf, bank resolution will remain a national task, resulting in a misalignment of responsibilities, and