therefore more credible and strengthens stability and confidence in the area ; ii ) a unified mechanism for the resolution of banking crises, so that individual countries no longer have to shoulder the burden of major upheavals on their own ; iii ) a unified deposit - guarantee mechanism to avoid banking panics. over the past year, these ideas and words have translated into concrete actions, and europe has demonstrated that it can carry out rapid, in - depth reforms, to ensure it emerges stronger from the crisis. i would just like to tell you where we stand currently in the move towards banking union. as you know, the area in which we have made the most progress is in supervision. european heads of state agreed to the principle of a single supervisory mechanism at the end of 2012, and we are in the process of actively preparing its implementation. by november, the main banks in the euro area will be supervised by a federalized system headed in frankfurt. a supervisory board will be established to plan and carry out the ecb ’ s supervisory tasks, undertake preparatory work, and propose complete draft decisions for adoption by the ecb ’ s governing council. moreover, the entire european banking system, including hungary of course, will be supervised on the basis of a single set of principles – the single rulebook – which has been compiled by the european banking authority. this is a huge step towards a more unified and consistent european banking system, and one that is therefore more robust and efficient. the move towards a single supervisory mechanism is firmly on track. last october, we reached another important milestone with the announcement by the ecb that european banks will be subject to a comprehensive assessment prior to the set up of the ssm in november 2014. bis central bankers ’ speeches this exercise is now underway. we must be aware that the exercise is an unprecedented one : about 130 participating banks – including 13 french banking groups – representing 85 % of the total assets of european banks, will simultaneously undergo a thorough asset quality review ( aqr ) using a common methodology, and this will be followed up with stress tests this summer. the purpose of this rigorous exercise is threefold : • to foster transparency about the condition of the european banking system ; • to take the needed corrective actions ; • and finally to restore confidence. of course, this exercise is a challenge. but i think that it is also a great opportunity for european banks to show that they have cleaned up their balance sheets and that they are trustworthy. as you can

pp. 1 – 65. see, also, “ reviewing the leverage cycle, ” by ana fostel and john geanakoplos, yale university, cowles foundation discussion paper no. 1918, september 2013. this type of uncertainty is analyzed in “ understanding uncertainty shocks and the role of black swans, ” by anna orlik and laura veldkamp, unpublished manuscript, 2013. bis central bankers ’ speeches most real - world fiscal and regulatory uncertainty is a mix of aggregate and cross - sectional uncertainty. given the aging of the u. s. population, we know that the revenues required to finance entitlement programs will certainly have to increase in coming decades. “ entitlement reform ” may ameliorate the problem but won ’ t eliminate it. government purchases will have to be cut, relative to baseline projections, and tax revenues will certainly have to be increased. but exactly which programs will be cut and which taxes increased, and when, is unclear and has been further muddled by the behavior of fiscal policy makers these past few days. the financial crisis and subsequent recession exacerbated these problems by increasing the outstanding stock of debt. u. s. federal government debt held by the public has increased from 34 percent of potential gdp at the business - cycle peak in first quarter 2001 ( shortly before the 9 / 11 attacks ) to 36 percent in fourth quarter 2007 ( just prior to the great recession ) to 70 percent of potential gdp today. this increased debt has been manageable as a result of a substantial fall in interest rates. indeed, interest on the public debt has trended downward from 4. 7 percent of potential gdp in 1990 to 3. 2 percent in 2007 to just 2. 1 percent in 2012 as the average interest rate on treasury securities has dropped from 9 percent to 5 percent, then to its recent level of 2½ percent. rates obviously cannot continue to fall, though, so the cost of servicing debt is sure to increase, even if the size of the debt relative to the economy stabilizes. the canary in the mine : capital investment capital investment is the economy ’ s canary in the mine because it ’ s often the first thing to succumb to uncertainty. also, once undertaken, capital investment is costly to reverse. investment has certainly been unusually sluggish in the wake of the recent recession. going back to when our data begin, in 1947, net investment as a percent of gdp has fluctuated around a constant mean of 5.