to be borne first by shareholders and creditors. after that, a bank - financed resolution fund will come into play, and only as a last resort are public funds to be used and the taxpayer made to pay. and there is even more to do before the banking union starts. one of the biggest preparatory steps is undoubtedly the comprehensive assessment of those banks which will fall under european supervision. this comprehensive assessment consists of two elements : a backward - looking asset quality review and a forward - looking stress test. the objective of the asset quality review is to uncover legacy assets in banks ’ balance sheets that were accumulated while the banks were under national supervision. the objective of the stress test is to assess how resilient banks are to stress scenarios. any capital shortfalls revealed by the comprehensive assessment have to be rectified before the banking union starts. ideally, this would primarily involve private funds. if private funds should not be available and the bank has a sustainable business model, the respective government could step in. ultimately, it is a question of who is responsible for past failings in banking supervision – and that is the individual member states. the comprehensive assessment will allow the banking union to start with a clean slate. at the same time, it will support the necessary deleveraging of european banks. balance sheets will eventually be “ cleaned up ” and any doubts regarding their quality will be removed. this will improve banks ’ capacity to lend to the real economy and thus support economic growth. against this backdrop, it is crucial that the comprehensive assessment is conducted in a tough and thorough manner. in this context, let me briefly compare the european stress test with the corresponding stress tests for the united states. one question might be : which of the two is stricter? well, comparing the strictness of these two stress tests is not that simple. in the united states, a threshold of 5 per cent of capital relative to a bank ’ s risk weighted assets is stipulated, in europe, it is 5. 5 per cent. does this mean the european stress test is stricter? in my mind, such a comparison is inadequate. bis central bankers ’ speeches a meaningful comparison should not only include the threshold for the capital, but also the macro scenario. however, the macro scenarios for the european stress test have yet to be finalised ; they are due to be published at the end of april. but even if we knew the scenarios, a comparison would still be difficult : the scenarios do not take into account just one variable

but, in my view, the risk of deflation is limited. and on this issue, the bundesbank and the ecb agree. the argument rests on three pillars : • first, around two - thirds of the drop in inflation is due to falling prices for energy and food. these are exogenous factors and their effects are likely to be temporary. • second, low inflation rates in the euro area are partly the result of necessary adjustments in the crisis - hit countries. these should also be one - off effects. • third, there are no signs of a self - enforcing downward spiral of prices and wages. long - term inflation expectations are firmly anchored at a level that is in line with the ecb ’ s definition of price stability. private households do not seem to be postponing expenditure in expectation of a further drop in prices. there are no indications of a substantial increase in the savings rate. fears of a fate similar to that of japan are therefore misplaced. moreover, the notion of japan ’ s “ lost decades ” needs to be seen in perspective. the weak growth in japan is partly a natural consequence of the country ’ s changing demographics, as the working - age population there has been shrinking since the mid - 1990s. that, incidentally, is an economic policy challenge that awaits some euro area economies in the years to come – most notably germany. 4. there are still some obstacles to overcome so, even after taking into account the issue of deflation, we can still see the light at the end of the tunnel. however, we have not reached it yet. there may still be some obstacles that could block the way – some of them we can already see, others we cannot see. bis central bankers ’ speeches the latter are what frank knight, one of the founders of the chicago school of economics, called “ unknown unknowns ”. a recent example is the political crisis in ukraine. however, while this is an example of an “ unknown unknown ”, it has only limited potential to prevent us from reaching the end of the tunnel. ukraine contributes only a quarter of a percent to global economic output. furthermore, the exposure of european banks to ukraine is relatively small. according to data from the bank for international settlements it stands at about us $ 23 billion. a known obstacle that could block our way, on the other hand, is the prolonged period of very low interest rates. but please do not misunderstand me : the current status of monetary policy