##ency of the financial system. the fed expects the banks it oversees, including the largest banks, to be financially sound. two core elements of soundness are capital and liquidity. capital is the funds provided by a bank ’ s shareholders that serve as a buffer to enable the firm to absorb unexpected losses, including during times of economic downturn or financial stress. a bank ’ s liquidity is its ability to meet current and future obligations to customers and others with whom it enters into financial transactions. liquidity is the lifeblood of a financial firm, because once liquidity dries up, the firm is no longer able to operate. beyond focusing on capital and liquidity, the fed also promotes safety and soundness by seeking to ensure that banks are well managed and subject to strong governance by a board of directors responsible to shareholders. it is unfortunate that i need to underscore this, but we expect the firms we oversee to follow the law and to operate in an ethical manner. too often in recent years, bankers at large institutions have not done so, sometimes brazenly. these incidents, both individually and in their totality, raise legitimate questions of whether there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness. 4 while the federal reserve looks closely at the individual safety and soundness of large financial firms, as i noted earlier, it is not sufficient to view each of these firms in isolation. the safety and soundness of large firms affects, and is affected by, the stability of the broader financial system. in the decades of relative financial stability leading up to the crisis, it is fair to say that the fed focused too much on individual firms and not enough on their role in the financial system and the implications of those firms ’ operations for financial stability. to a current list of these firms is available on the federal reserve board ’ s webpage “ large institution supervision coordinating committee “. this list may evolve based on changes in firms ’ relative systemic importance. financial stability oversight council determinations of nonbank financial institutions subject to federal reserve oversight are available on the u. s. department of treasury ’ s website. information is based on data from the most recent fr y - 9c report, which is filed quarterly by bank holding companies and savings and loan holding companies. to access the report, see the board ’ s webpage “ reporting forms “. for more information, see daniel k. tarullo ( 2014 )

causes of such differentials. monitoring national and sectoral developments is key to understanding the underlying trends in the euro area as a whole with a view to formulating the most appropriate monetary policy response. consequently, the ecb regularly reviews and analyses all relevant information relating to the various sectors and countries of the euro area. in this respect, particular attention must be given by responsible authorities to the evolution of competitiveness indicators, in particular of unit labour costs in the various national economies. these indicators are key in a single currency area where realignments are excluded by definition. the ecb ’ s quantitative definition of price stability, its high degree of credibility and its focus on the achievement of its primary objective have enabled it to control inflation and to anchor inflation expectations in the euro area at a very low level in all countries of the euro area. this has resulted in low interest rates and extremely favourable financing conditions to the benefit of all euro area economies. moreover, by anchoring inflation expectations and increasing transparency, monetary policy contributes to the adjustment of relative prices and facilitates the role of such prices in guiding the allocation of resources across countries and sectors. this is the best contribution that monetary policy can make to economic welfare and the achievement of high levels of activity and employment in our economies. fiscal policies and the stability and growth pact let me now turn to fiscal policies. while a few countries succeed in maintaining sound budgetary positions, developments in many euro area member states remain disappointing. unless additional measures are taken, it is looking increasingly unlikely that those countries will reduce their deficits this year below the reference value of 3 % of gdp or prevent them from exceeding that level. in the meantime, the indebtedness of euro area governments as a percentage of gdp has again increased. it is therefore essential that consolidation be given the highest priority in the countries concerned and that the reformed stability and growth pact be implemented in a strict and timely manner to ensure a rapid return to sound budgetary positions. this is primarily in the interests of the countries themselves, especially in view of the increasing pressure being placed on government budgets by ageing populations. lisbon strategy i would also like to take this opportunity to stress again the need to implement structural reforms in europe. these reforms should be aimed at realising a more dynamic and competitive economy with flexible labour, product and financial markets, allowing for a more rapid adjustment of production factors to a constantly changing environment. we are faced with the unavoidable challenges arising from an ongoing deepening in the global division