far more diversified today than in the past, so that brexit is just one factor among many in determining overall economic performance. still, we view brexit as a major downside risk for the irish economy and will be closely monitoring developments in the uk economy as the full impact of brexit takes hold. let me now turn to the primary goal of my speech, which is to discuss the potential implications of brexit for the configuration of the european financial system, with a primary focus on the euro area. if the uk - eu negotiations deliver an agreement that effectively preserves the single passport for uk - resident entities selling into the eu, the net impact of brexit on the structure of the european financial system might be quite minor. however, in scenarios in which uk - resident firms are no longer treated as equivalent to eu firms for regulatory purposes, it is likely that significant migration of financial activity from the uk to the eu will occur. in particular, it is plausible that a larger fraction of trade in euro - denominated financial instruments will take place inside the euro area, with ancillary implications for the location of financial lawyers, professional services firms, central counterparties, clearing services and settlement services. in order to more easily meet regulatory requirements, there may also be shifts in the organisation of the banking groups. in addition, we may expect to see non - eu banks looking to set up subsidiaries in the eu and eu - resident banks possibly converting uk branches into subsidiaries. 1 / 2 bis central bankers'speeches in the post - brexit environment, it is unlikely that financial activity will cluster in a single location in the euro area, since no individual location offers a close substitute to london. an open question is whether the decentralisation of the european financial system will impose significant efficiency costs. once a location is established as a dominant financial centre, there are many selfreinforcing factors that help it to maintain a hegemonic position. most obviously, a deep labour market for financial - sector workers and a localised stock of intangible financial knowledge are highly attractive both for new financial firms and new entrants to the labour market. however, if a shock fundamentally disrupts this equilibrium configuration, it does not follow that a new dominant location will inevitably emerge, since there also countervailing factors that work against the concentration of activity in a single location. this point is especially relevant in the context of the euro area, given the diverse characteristics of its

reluctant ( as indicated in my january 2011 speech ) to endorse further accumulation of indebtedness of the state in order to recapitalise the banks to insulate the financial system and the economy against tail risks. even if external insurance was not available, direct injection of the capital from external sources would have been a much better solution. however ( as has been seen again with the case of spain ) this was simply not on offer, limiting the possibility for decoupling the pressures of the banking system from those of the sovereign. global upward pressures have increased the amount of capital banks are expected to maintain as both market participants and regulators reassess the uncertainty and volatility surrounding bank asset valuations. and it ’ s not just a question of ratios : upgraded regulatory requirements will soon disallow some elements of what used to be counted as capital, placing further upward pressure. for ireland, the agreement with the troika requires irish guaranteed banks to hold sufficient capital not only to meet the crd ( international regulatory requirements ), but to have enough to absorb prospective losses over the period 2012 – 2014, based on the independent calculations of blackrock solutions, and the cost of selling - off non - core assets sufficient to bring the loan - to - deposit ratios of the banks back into a plausible range ( not more than 122½ % ), and to maintain the higher threshold of 10½ % capital ( even excluding elements of capital that are not regarded as “ core tier 1 ” ) in the base case scenario. this is what determined the additional capital requirements announced in march 2012. our assessment of the capital needs of the banks will evolve over the coming years. as i stressed here eighteen months ago, loan - loss projections following a big bust involve an irreducibly large element of uncertainty. at the central bank, we continue to research the determinants of loan losses. economic conditions ( including house prices ) facing the borrowing firms and households are not the only determinants. as we have been stressing in other fora, the effectiveness of the banks ’ engagement with their stressed borrowers, as well as the legislative and administrative framework for dealing with insolvency ( details of which are being announced by the government today ) are important factors. it should not be thought a paradox that a more engaged and holistic approach by banks, and a less rigid and costly insolvency framework can help reduce loan losses over time. meanwhile, given the final view of