was that there was a lack of financial resources. it was not until mid 1990s the practice of provisioning was overhauled. however, generally speaking, the proportion and scale of provisioning are insufficient, implying that commercial banks are not financially strong enough to write off all of the bad loans. as a result, only a small portion of the bad loans was written off and overtime, large amount of npls has been accumulated. in order to prevent this from happening again after the reforms, commercial banks should build up loan reserves based on stricter accounting rules and loan classification standards and be given discretion to write off losses in a timely manner. directly relating to loan provisioning is the reform of relevant tax polices, which involves tradeoffs between the state interests and the sound development of the banking sector. banks in china are levied not only the corporate income tax but also the unique business tax. if provisions are included in the taxable income, commercial banks are subject to heavier tax burden and their ability to absorb npls is weakened. 4. markets to trade risk products and non - performing assets should be developed. just as mr. schwab has talked about a while ago, in order to help identify risks in bank assets, price and transfer risks through normal transactions, we need to develop a market where risk products can be traded. in a typical market for risk products, the products traded are mainly cds ( credit default swap ) and cdo ( collateralized debt obligation ). through buying and selling risk products, the probability of default is priced and traded. if such risk products are absent or a market where such products can be traded is absent, it would be difficult for the banks to efficiently identify risks and estimate the potential scale and value of loss if defaults materialize. in such circumstances, the commercial banks cannot sell the risks they want to part with in managing their balance sheets. meanwhile, institutions that have financial resources and are willing to bear higher risks so as to receive higher returns, would find it difficult to buy such risk products. in this regard, a risk product market is required to facilitate commercial banks managing their risks. similarly, for the npls already accumulated by the commercial banks, a market to trade npls needs to be established to facilitate disposal of npls according to the market rules. after the asian financial crisis, four asset management companies were set up in china in 1999 to dispose of the npls removed from the books of four state - owned commercial banks. foreign investors and

##ly obvious – previously, the financial markets appeared to assume that, should individual euro - area countries experience financial difficulties, the european community would bail them out, even though the eu treaty prohibits mutual liability. as a result, doubts as to the soundness of individual governments led to doubts regarding the euro area as a whole. it is therefore extremely important that, in the future, it is possible for over - indebted states to default. for one thing, this would significantly limit the extent of future crises ; for another, it would reduce the likelihood of the european community of states having to intervene. until then, however, we still need to overcome a few obstacles. one major obstacle is the strong nexus between banks and sovereigns. it means that insolvent banks can pose a threat to the solvency of entire governments, and vice versa. banks are not required to back bonds issued by european governments or other oecd countries with capital, and can hold unlimited quantities of them on their books. in theory, a bank ’ s business could therefore consist entirely of bonds issued by a single state. this rule creates a troubling risk concentration. to sever this unhealthy link, we need to make just one simple change. in future, banks must back the government bonds they purchase with sufficient capital. in short, the existing rules need to be improved to ensure that both creditors and borrowers consider the risks more carefully when lending or borrowing. however, this reform won ’ t be enough on its own to resolve the euro area ’ s underlying problems. another starting point for reform would therefore be to intensify the coordination and integration of economic policy within the euro area. without an integrated economic policy, it is difficult for the economies in a currency union to converge. implementing deficit ceilings for government debt is another area in which progress needs to be 2 / 4 bis central bankers'speeches made. all member states should adhere to these ceilings – in no way should they be seen merely as recommendations. the onus here is clearly on politicians. central banks can apply pressure, at most. 4. where is europe heading? now, there will be some who say that these reform proposals sound too ambitious given the current state of europe. but there are signs that the eu is indeed both willing and able to reform and that, overall, it is making progress. i would therefore like to bring three points to your attention. first, it goes without saying that you can think long and hard