are fully aligned with its european financial stability mandate. a second reason why banking union is essential to monetary union is that it supports the implementation of the single monetary policy. the even transmission of monetary policy across all member countries of the euro area requires a level of financial integration that dirk schoenmaker ( 2011 ) “ the financial trilemma ” in economic letters, 111, pp. 57 – 9. bis central bankers ’ speeches ensures well - functioning cross - border money markets. yet we have seen during the crisis that without a euro area - wide approach to financial governance, financial markets can end up re - nationalising. a strong banking union can help mitigate several sources of this fragmentation. a single supervisor should enhance transparency and thus increase trust in cross - border lending, while supervisory ring - fencing or national asset - liability matching would no longer be relevant given the ssm ’ s european focus. in addition, an effective single resolution mechanism would help attenuate the infamous bank - sovereign nexus. sovereigns would have less ability to intervene in failing banks, thus allowing bank risk to be better separated from sovereign risk. the third reason that justifies the banking union has to do with the effects of unsupervised cross - border lending on real economic developments. contrary to the “ it ’ s mostly fiscal ” view of the crisis, 2 financial sector developments largely explain the build - up of unsustainable current account and competitiveness positions in peripheral countries before the crisis. the current account deficits in most peripheral countries were in fact led by huge capital inflows implying capital account surpluses. the exposures of banks from core to peripheral countries more than quintupled between 1999 and 2008. competitiveness losses were simply the mechanism that connected the capital surplus and the current account deficit – that is, an appreciation of the real exchange rate caused by economic over - heating. as john williamson explained long ago it is impossible to have “ an immaculate transfer ” from capital inflows to current account deficits. 3 national supervisors found it impossible to contain these developments because they had to respect the single market rules and lacked the macro - prudential tools to offset the effects of large capital inflows. but by creating supervision at the level of market, banking union offers a possibility to better pre - empt such developments in the future – and therefore to better protect the real economy, growth and employment. the ssm and the practice of banking in europe let me now turn to the

potential to increase the supply of credit and reduce the price at which it is granted. another important channel through which asset purchases work in the euro area is the broad portfolio balance channel. if different assets are imperfect substitutes, interventions by the central bank that affect the supply of various assets available to private investors could influence the prices of many other assets, including investment grade bonds, equities, real estate or foreign assets with consequences for the exchange rate. higher valuations facilitate the process of balance sheet repair that is on - going in the euro area, and more generally contribute to support credit growth. we see that the various effects also impact the credit channel. finally, asset purchases also operate through a signalling effect, i. e. by affecting expectations of future inflation and the future likely path of the key ecb rates. for the u. s., there is indeed evidence suggesting that quantitative easing contributed to increase inflation expectations, and therefore that asset purchases by the fed reduced real interest rates. lower real rates stimulate aggregate consumption and investment, and ultimately contribute to a faster return of the euro area inflation rate to levels consistent with our definition of price stability. all these transmission channels show that the effects of our policy go well beyond the direct effect on the yields of the purchased securities. therefore, the criticism that the policy would not be effective on account of already low sovereign yields is not well founded. even less valid is the argument that sovereign bond purchases ease the pressure on governments to do structural reforms. it is not the task of a central bank to exert more or less pressure on governments to adopt policies for which governments ’ are responsible. they should implement the reforms that are necessary. in order for central banks to deserve their independence they have to fulfil their responsibility of ensuring price stability in the mediumterm, an objective that monetary policy has the power to achieve. to be credible, central banks must act in a symmetric way, avoiding both too high and too low inflation. recent figures confirm that our policy is indeed working according to plan. conditions in a host of asset markets, from equities to bonds or foreign exchange, have reacted in the expected way through the portfolio rebalancing transmission channel of monetary policy. since january, equity prices have gone up by 14 % and by 18 % since last may, lowering the cost of equity for non - financial firms and banks ; the effective exchange rate has come down by 3 % since january and by 12 % since last may ; corporate bond yields have