situation in which the banks found themselves would improve over time ( borio 2016 ). as a consequence, structural weaknesses, legacy problems, and poor returns have persisted for many banks in the post - crisis period. generally speaking, a distinction can be made between policy responses that were agreed upon globally and those where national discretion was exercised. macroprudential policy has been established as an important new policy field after the crisis, and key responsibilities lie at the national level. also, and despite international coordination and standard setting, national policy remains responsible for dealing with the recovery and resolution of banks. this degree of national discretion needs to be taken into account when assessing the effects of policies on outcomes. given the complexity of the issues at stake, this paper needs to be selective. i will address the following issues : first, ten years after the crisis, i will show indicators which reveal where we stand in terms of adjustment in the real economy and the financial sector. the evidence will turn out to be mixed. progress has been made with regard to cyclical recovery and financial sector reforms. but underlying structural issues, such as high debt levels and subdued productivity growth, remain on the agenda. at the same time, heterogeneity in adjustment across banks, markets, and countries is substantial. second, i will describe the channels through which the banking sector and real performance interact. sufficient market dynamics, in both the financial sector and the real economy, are needed to promote investment and productivity growth. what is needed is an environment that encourages the private sector to undertake productive investments. such investments are inherently risky, hence mechanisms are required to share risk while preventing excessive risk taking. the capital market union can be an important project for improving private sector risk - sharing mechanisms in europe. concrete implications for national policies may differ, given the heterogeneity in adjustment that can be observed. moreover, analyzing the interaction between the real and financial sector based on aggregate time trends is difficult. understanding the effects of structural change in the real and financial sector on market dynamics, the entry and exit of firms, and sectoral reallocation as an engine for economic growth requires disaggregated data. such data show that the weak performance of banks and of the real economy is two sides of the same coin. third, enhanced evidence - based policy has a vital role to play at the european level. given limited fiscal resources, it is important to understand “ what works ” and what constraints actually hold back investment and growth. good

one point is of particular importance to me here : fiscal backstops are not the path towards to greater mutual liability. fiscal means can only ever be the last resort within a well - defined liability cascade. but without this last resort, there is the risk of bank recoveries or resolutions being delayed. this is why it must be ensured in advance that fiscal means are available to plug any capital shortfalls in an emergency. only then will the resolution authority at the head of the decision - making chain take on the risk of resolving a systemically important institution. this will make creditor bail - ins the rule and not the exception. this, in turn, is the prerequisite for risks being adequately priced by lenders. 5. where is further economic policy action needed? i mentioned three aims of the banking union at the beginning of my speech : more strongly integrated and also more stable financial markets, as well as the need to disentangle the risks of banks and governments. the banking union alone will not be able to achieve these aims, but it is a key building block that must be augmented and soundly anchored. i would like to emphasise three areas. first, credibly separating the risks of banks and governments requires further regulatory action plans. the banking union by itself does not change banking regulation. in future, the resilience of institutions will be strengthened by basel iii and the additional capital requirements for systemically important financial institutions. but this is not enough. the preferential treatment afforded to government debt instruments needs to be put to an end in the medium term. sovereign bonds need, like other bank exposures as well, to be backed by capital. the existing limits on large exposures should be gradually extended to cover sovereign debt. second, deeper integration of the markets for capital in europe should be made possible. after all, cross - border investment allows opportunities – and risks – to be better shared. this strengthens the resilience of the financial system. despite the essentially free movement of capital, there are still legal and institutional barriers in europe. third, the banking union can accelerate integration of the financial markets by introducing a common set of supervisory standards. but above all, it can also contribute to better risk assumption by the private sector. the single resolution mechanism in particular is expected to make private investors participate in risks that materialise. but for this to become reality, the new rules need to be rigorously applied, and exceptions to the bail - in of creditors must be mini