, it is easier for the central bank to support the economy as healthier banks tend to lend more. the worst case, to say it very bluntly, is of a central bank providing liquidity to banks just to buy or carry legacy assets, and the banking sector doesn ’ t restructure. this was typically the japanese situation in the early 2000s. perhaps paradoxically, a rigorous aqr and stress test helps monetary policy. appropriately treating banks ’ holdings of sovereign debt according to the risk that they pose to banks ’ capital makes it unlikely that the banks will use central bank liquidity to excessively increase their exposure to sovereign debt. this is because banks will be wary of the constraints placed on sovereign debt by the stress tests to which they are subject at the same time. therefore, should the procyclical impact of the aqr be significant, then monetary policy would be able to act – without hesitation and being reassured that the side effects of a liquidity injection that we have seen for the 2011 – 2012 operations would be minimised. so how would you assess whether the aqr was procyclical? don ’ t forget we have our two pillar approach : we analyse the business cycle, but we also look at money and credit. we will see from the second pillar very quickly if the credit situation doesn ’ t improve. at this stage of the recovery, what we see at the moment is quite normal. the big corporate firms do not have as many constraints as the smes. they have around €2trn in excess cash, they can access debt markets. the reluctance to invest comes more from the business confidence side. and if you did act because of the impact of the aqr, what exactly would you do? depending on the situation, the central bank can decide on the most effective way liquidity provision can be provided. there are no restrictions on the way a central bank provides liquidity to the banks via repo, a priori. bis central bankers ’ speeches you want to reach your price stability objective. at the same time, you want to be sure that when you provide liquidity against adequate collateral, it doesn ’ t reduce the incentive to restructure the banking sector. and so by having a well - designed comprehensive assessment – like the one we ’ re preparing now – we are easing the job of the central bank. bis central bankers ’ speeches

from 1937, in the aftermath of the great depression, when he said : “ just as it was advisable for the government to incur debt during the slump, so for the same reasons it is now advisable that they should incline to the opposite policy ”. 1 fiscal consolidation and growth are not mutually exclusive. i disagree with the view that reducing public expenditures will hinder economic growth. on the contrary, prudent fiscal management provides the basis for balanced and sustainable growth. stability - orientated fiscal policies will foster confidence among households, entrepreneurs and investors, which will ultimately increase our welfare by creating new jobs. 2. how should we address european modalities of today ’ s global challenges? i have outlined three key areas for efforts to shape the contours of the post - crisis world – reform of the institutions of global governance, reform of the financial system and reform of public finances. these are global challenges affecting in particular the industrial economies. i would now like to explain how europe specifically is responding to these challenges. an ambitious agenda lies before the continent. it is not only a visionary agenda : it has to be pursued with determination right now. we have to demonstrate the same spirit with which the european union was progressively developed over the past half - century : setting objectives, agreeing deadlines and mobilising the necessary political will within parliaments. europe ’ s governments are committed to pursue fiscal consolidation. those within the euro area have formally declared that they will take “ all measures needed to meet fiscal targets this year and the years ahead in line with excessive deficit procedures ” ( euro area heads of state or government declaration of 7 may 2010 ). some of them have made precise additional commitments to accelerate fiscal consolidation and ensure the sustainability of their public finances. fiscal consolidation is being put in place at the same time as we strengthen the resilience of the european banking sector. publication of the detailed results of a harmonised paneuropean stress test is an important step in the right direction. these tests will increase transparency and enhance investors ’ confidence in europe ’ s banking sector. they will also contribute to restoring the important intermediation role of the interbank market in channelling funds within europe. 3. where next? so where do we go from here? as i have indicated, collectively as european and global policy - makers, we need to ensure economic recovery and renewed confidence, while reducing fiscal deficits and remaking the financial system into one that supports the real economy. this