. these market events were starting to harm the real economy. corporates in stressed countries were struggling to issue debt, and bank loans were becoming prohibitively expensive. but today, the situation is improving. borrowing costs for most governments have returned to more sustainable levels. funding for banks in countries under stress has improved significantly, even if this has not yet been fully reflected in the cost of credit. and measures of systemic risks have dropped to pre - 2011 levels. why has this happened? bis central bankers ’ speeches the role of governments the first reason is that governments are addressing their fiscal policy challenges. thanks to their consolidation efforts so far, the primary fiscal deficit for the euro area has fallen from 3. 5 % of gdp in 2009 to around 0. 5 % in 2012. this is projected to turn into a primary surplus from 2014 onwards. this improvement in public finances has helped send a signal to investors that government debt levels will stabilise and then fall in the future. this has been crucial in reassuring markets about debt sustainability. but the average public debt level in the euro area is still very high, at around 95 % of gdp. this means that consolidation efforts need to be maintained in the years to come. the role of the ecb the second reason for the improvement in markets is actions by the ecb, notably through the announcement of outright monetary transactions ( omt ). our measures have countered investors ’ fears about the future of the euro area that emerged last year. as such, they have helped restore the normal functioning of markets, and removed the uncertainty that was paralysing the economies of some countries. the impact of the omt announcement has naturally been largest in countries where the uncertainty was greatest. but its effects have been felt across the euro area. capital has started flowing back from the core to the periphery, unwinding some of the distortions in interest rates we saw last year. in germany, for example, long - term interest rates have risen significantly, despite the ecb cutting rates in that time. target2 balances have fallen by around 30 % from their peak. more generally, the risk of an extreme event in the euro area has fallen – and therefore the risk of an adverse impact on price stability. this threat to euro area price stability was the reason we had to act. we had to preserve our mandate. but i am encouraged that throughout this period, inflation expectations remained firmly anchored. this shows that markets and citizens trust the ecb to maintain price stability.

the pipeline. some of them are currently under construction, and others are still on the drawing board. let me outline to you the most important initiatives. let ’ s begin with the completion of basel iii, which the basel committee is currently in the process of finalising. the new basel framework marked a milestone in the regulation of banks. no sooner had it been put in place than the basel committee set about tackling the variability of risk - weighted assets in portfolios with essentially similar risk profiles. this variability makes it more difficult for investors to compare one bank with another. that is why the basel committee is currently overhauling the standardised approaches for credit, market and operational risks. it is also planning to introduce capital floors for internal models based on the standardised approaches. together with enhanced disclosure formats, this will make it much easier for investors to compare and monitor banks and their risk profiles. another fundamental change to the regulatory framework for banks, as i see it, is a revision of the privileged treatment of sovereign bonds. this is another item currently on the basel committee ’ s agenda. there is no regulatory or economic justification for such preferential treatment. the sovereign debt crisis that swept across the euro area made it crystal clear just how risky the nexus between sovereigns and national banks can be. that is why the bundesbank is pushing for government bonds to be backed with a risk - appropriate amount of capital and for large exposure limits, just as they exist for claims on private debtors. we also need to make sure that adequate rules are introduced in the area of liquidity requirements. while i ’ m certain that tough “ political ” negotiations still lie ahead, i ’ m nonetheless confident that the preferential regulatory treatment afforded to sovereign debt will be revised in future. and this will realign incentives and risk premiums to prudent levels. a third new element is the recovery and resolution regime that has been agreed globally and implemented across europe. it was created to solve the problem of “ too big to fail ” banks and to keep taxpayers from having to bear the brunt in a crisis. this new core element of the banking regulation and supervisory framework is currently being finalised on the basis of the guiding principles issued by the international financial stability board, or fsb for short. this resolution regime is a vital step forward in learning one of the key lessons of the financial bis central bankers ’ speeches crisis : the much discussed issue of moral hazard – a problem that arises because institutions that up to now were