we also need to facilitate the flow of capital and liquidity within banking groups, subject to adequate financial stability safeguards and establish the third pillar of banking union – the european deposit insurance scheme. policy considerations for the non - bank sector the developments in the investment fund sector highlight the fact that the current policy framework relies to a large extent on ex post liquidity management tools such as suspensions or gating, which asset managers can use at their discretion. however, we saw that these tools were not enough to alleviate the liquidity strains from a system - wide perspective and can have adverse effects on investors scrambling for liquidity. only the decisive policy action by central banks helped stabilise financial markets and improve liquidity conditions across a broad range of markets and institutions. this suggests that a comprehensive macroprudential approach for non - banks needs to be devised. policies should address system - wide risk and reflect the fact that the sector comprises a diverse set of entities and activities. this would ensure that the non - bank sector is better able to absorb shocks in the future. authorities should be equipped with a range of policies to effectively mitigate the build - up of risks during periods of exuberance. in particular, the liquidity of investment funds ’ assets should be closely aligned with redemption terms. funds should also be required to hold a sufficiently large share of cash and highly liquid assets to manage increased liquidity needs stemming from outflows or margin calls in periods of 3 / 4 bis central bankers'speeches stress. during the spring turmoil, increasing margin calls helped to ensure that the extraordinary market volatility did not result in concerns about counterparty risk. at the same time, it contributed to amplify the liquidity pressures in the system for non - bank financial intermediaries in particular. this warrants further analysis to assess whether adjustments to margining practices and the related regulatory approaches are needed to reduce excessive procyclicality in initial margins. as money market funds also demonstrated significant vulnerabilities during the recent market turmoil further work should focus on enhancing liquidity requirements and reconsidering the share of their liquid assets. conclusion let me conclude. as i ’ ve outlined, the banking sector has weathered the crisis to date fairly well, despite a number of risks and vulnerabilities. it has helped to absorb the shock and avoided a credit crunch that would have been detrimental to the economy. going forward, it is urgent to tackle structural weaknesses in the european banking sector, by

doubling in the value of loans where credit risk has significantly increased since origination, also known as stage 2 assets. and despite these efforts, loan loss provisions of euro area banks, could still be below needs suggested by fundamentals. newly originated loans have also tended to have greater credit risk, with banks reporting a higher probability of default according to their internal ratings - based portfolios in the second quarter of the year. this is in line with results of the ecb ’ s vulnerability analysis. under the baseline scenario, credit losses would continue increasing and the solvency position of the significant euro area banks would deteriorate by mid 2022. moving on, the non - bank financial sector continued to be an important source of financing for companies and thereby helped support the economic recovery. non - banks have absorbed the vast majority of the new debt securities issued by non - financial corporates in the euro area this year – notably also from sectors more sensitive to the economic fallout from the pandemic. at the same time, non - banks also played a more negative role in amplifying the market turmoil this spring. investment funds, including money market funds, experienced outflows of a magnitude last seen during the global financial crisis. this only stopped once the ecb launched its pandemic emergency purchase programme ( pepp ). the pepp indeed proved to be a turning point in financial markets. flows into investment funds turned positive again in the subsequent months, quickly compensating for all the redemptions experienced in february and march. however, these flow dynamics imply that investment funds shed large volumes of assets procyclically, in the first quarter of the year, before becoming a net buyer again once market valuations started to recover. one major reason why investment funds are particularly liable to amplify adverse market dynamics is their structurally low liquidity buffers. low cash holdings force investment funds to sell relatively illiquid assets in the event of outflows, which serves to depress asset prices. although funds temporarily increased their holdings of liquid assets in response to this year ’ s market stress, their cash positions have already returned to pre - pandemic levels. this again leaves the sector vulnerable to large redemptions in the event of any renewed stress in the financial markets. moreover, financial vulnerabilities were aggravated by investment funds continuing to increase their exposure to credit risk. more than three - quarters of the bonds purchased by funds after march 2020 were rated bbb or below. policy