your credit decision is seriously flawed and sooner or later will translate itself into npa. why do we have high levels of npa? is the information necessary for evaluation of creditworthiness of a borrower available to the banks? is the credit decision taken on the basis of such evaluation - how current is the financial information on the borrower with the bank? the market is a dynamic place, where change takes place all the time. it is imperative that credit officers of banks be given maximum exposure to the real sector - the numbers in financial statements must have a direct relationship to the real sector to reflect the current status of the borrower ’ s business? they should support the repayment programme undertaken by the borrower on which the bank ’ s credit decision was predicated. you will see thus that information is critical to risk management without which you are groping in the dark and before long you will be faced with large losses. the emphasis should therefore be on the early identification of risk, which if addressed at the very initial stages, would not expose the bank to large scale losses at a later stage. effective credit risk management is the key to the health of the banking industry today. it is not the resolution of npa but the cause of npa that should be addressed. internal rating systems must be developed to afford an accurate and continuous picture of the level of risk exposure of the bank to individual credit risk so that timely action can be taken to soften the risk. management information systems must be strengthened. preventive and remedial actions should encompass additional capital, better internal controls and / or safer provisioning policies. capital is not a substitute for sound risk management. an operating environment based on prudent risk management rather than aggressive risk taking, gives us regulators comfort that profits are conservatively stated. this is the essence of prudence which underpins safe and sound banking. in an increasing trend to harmonise prudential frameworks across the globe, in recognition of the fact that banks, wherever they may be domiciled, are exposed to the same risks, it is becoming increasingly difficult to pursue country - specific solutions. we recognize that we too have to be internationally compatible in adopting common standards for regulation and supervision which are spearheaded by the basel committee. global financial reporting practices are not far away and there are efforts underway to establish a common set of internationally accepted financial reporting standards. differences of opinion between standard setters and regulators need to be reconciled ias 39 is one such which is

especially when monetary and fiscal policy have limited room for manoeuvre. as often in the past in the case of the european project, now, in the current context, bold decisions are more needed than ever. the completion of banking union is in many aspects a way to restore european citizens ’ confidence in the european institutions, build the necessary trust between member states and address the rise of euroscepticism. this starts by putting aside the risk reduction vs. risk sharing debate that is preventing the establishment of a fully - fledged edis. edis is a necessary risk reduction instrument that reduces moral hazard7 – and should be recognized as such. recent research by the ecb has shown that with proper risk - based banks ’ contributions, an almost negligible cross - border subsidisation occurs. 8 the fear that edis could imply significant transfers across countries in case of a new banking crisis is therefore unjustified. but establishing edis in isolation is not enough. recent experiences put the topic of harmonising eu banks ’ liquidation regimes on the agenda of policymakers. but what does bank liquidation mean? and do we have the tools to ensure its orderliness in the current context? before jumping into the harmonisation of liquidation regimes, it must be acknowledged that this is not a silver bullet. indeed, the considerable social and economic impact ensuing from the failure of a bank with systemic relevance at local level would remain. recent calls to form a sort of european fdic ( a version of the american federal deposit insurance corporation ), merging the single resolution fund ( srf ) and edis into one single entity, 9 are welcome in this regard, provided that the legal framework is fixed and that financial stability – both at european level as well as at national level – is enshrined as the first and fundamental objective of any intervention. in fact, the establishment of banking union was inspired by the american fdic. however, it fell short of providing the srf or edis with right instruments and means to guarantee financial stability. for this to happen, a clear definition of what constitutes public interest and critical functions is required. in view of recent cases, it has been argued that public interest is likely to be a variable of time and geography, “ one at the eu level and another one by national authorities ”. 10 this discussion cannot be taken only at technical level as its consequences are at the core of banking union ’ s credibility. european citizens expect this from us. 3 / 4 bis