of another financial crisis. matters are likely to become worse if additional credit availability enables enterprises to postpone balance sheet adjustment. so, the focus should be on the proper allocation of credit instead of its aggregate amount. it is important that good borrowers rather than the bad ones are the main beneficiaries of credit growth. i am not downplaying the importance of credit in fostering economic activity. far from it. bank credit and other debt instruments are crucial to all economies, but balancing the risk and opportunities is always a challenge, a challenge that we must never forget. the crisis has demonstrated very clearly the importance of limiting the reliance on debt - financing and having adequate safeguards in place to prevent credit bubbles. a shift toward more equity financing is urgently necessary, for which, an appropriate environment has to be in place for attracting new non - debt capital flows. * * * so, what should be the way ahead? putting the economy back on track requires a coherent, integrated national policy strategy to restore the health of the financial sector, restructure the corporate sector, and reinforce the sustainability of the public finances. the economic recovery must be based on equityfinanced investment and not on debt - financed investment. given the need to ensure fiscal sustainability, recourse to more state funding for restructuring the economy and increasing investment is not a feasible option. some of the required policy measures, notably in the financial sector, have been and are being implemented. without a determined follow through with supporting measures on other fronts, the fragile economic recovery will stall and problems will intensify. * * * priority has been given to repairing the balance sheet of banks. based on the findings of a comprehensive asset quality review and stress tests in late 2013, balance sheets of four banks have been repaired through recapitalization and transferring non - performing loans to bis central bankers ’ speeches the bank asset management company. the findings of the recently concluded comprehensive assessment indicate that, notwithstanding these efforts, the health of the banking sector remains fragile. this is not surprising. the banking system is the nerve center of the entire economy. nonperforming loans remain high even after the transfers to the bank asset management company and their volume has increased in the course of 2014. this is a result of the still weak economic growth, slow deleveraging in the corporate sector and too slow enterprise restructuring. the rehabilitation strategy also involves bank resolution through liquidation, consolidation and privatization. two small domestic banks are currently in the process of being

benoit cœure : the implications of bail - in rules for bank activity and stability opening speech by mr benoit cœure, member of the executive board of the european central bank, at the conference on “ financing the recovery after the crisis – the roles of bank profitability, stability and regulation ”, bocconi university, milan, 30 september 2013. * * * i wish to thank paolo emilio mistrulli for his contributions to these remarks. i remain solely responsible for the opinions contained herein. ladies and gentlemen, i would like to thank carefin and the department of finance at universita bocconi for inviting me to speak today in milan. i would like to use this opportunity to focus on what is in my view a crucial aspect of bank stability, namely, the existence of effective resolution mechanisms. excessive risk - taking by banks is at the origin of the financial crisis. one of the many factors contributing to their risk - taking behaviour was the distorted incentive structure resulting from the lack of an effective resolution mechanism. establishing a strong approach to bank resolution is an essential component of properly realigning incentives towards risk. why is this the case? as you know, bank resolutions are often costly, complex and timeconsuming, in particular for large institutions. without alternative ways to restore their viability, governments have too often found themselves compelled to bail - out entities using taxpayer money. this government support may be successful in avoiding financial contagion within closely interconnected banking system. but the expectation of assistance via publicly funded bailouts amplifies moral hazard, leading to excessive risk - taking. moreover, in the euro area it has nurtured what became the nexus of the crisis, the fatal feedback loop between bank and sovereign creditworthiness. so these are already two reasons to rethink the allocation of losses in bank resolution. the former is general and the latter is specific to the fragmented structure of the euro area. a third reason, which i will not discuss here, relates to the political economy of bank resolution. even if it were efficient for financial stability reasons to let taxpayers bear the burden of losses in resolution, it would be unpalatable to them, and it would be unfair unless they can exert effective control on the risk - taking behaviour of banks – which has not been the case so far. existing bank resolution mechanisms are being overhauled in many countries following the adoption in 2011 of the financial stability board ( fsb ) ’ s key attributes for