profitability prospects on account of cost inefficiencies and the legacy stock of non - performing loans. third, the still high debt levels could give rise to concerns about public and private sector debt sustainability. fourth, the euro area investment fund sector continued to expand and increase its risk - taking while facing liquidity mismatches. some of these risks depend strongly on global developments, whereas others – including real estate risks – are more specific and should be addressed through macroprudential policies. while we do not see misalignments in euro area real estate markets as a whole, price increases in some countries require the correct response by means of employing macroprudential policy measures. given the uncertainty about the impact of individual measures, there is a need for an appropriate mix of tools, which can include both borrower - based measures, such as limits on loan - to - value or debt - to - income ratios, and tighter risk weights for bank exposures and capital requirements. most of these instruments are not foreseen in the crd iv / crr. we therefore hope that the ongoing review of the two documents will enlarge the set of macroprudential policy tools and simplify the activation procedure for the use of these tools provided for in article 458 of the crr. this would allow macroprudential authorities to act in an efficient, effective and timely manner. early detection of the build - up of systemic risks and the timely employment of measures, including macroprudential ones, is of paramount importance to maintain financial stability. a robust financial system can however, only be ensured if we have strong and appropriate financial regulation in place. since the crisis, the international financial regulations have been comprehensively overhauled and have now finalised the basel iii framework. but the work is not yet complete. looking ahead, a fully - fledged banking union should be our key priority in order to enhance stability and increase the soundness of the system. and the european parliament has a crucial role here. significant risk reduction has been achieved : bank capital ratios stand now at comfortable levels, mrel is being implemented, bail - in as foreseen in the brrd must take place before any possible esm intervention, private sector debt and leverage has declined. this should, in our view, unlock the negotiations on a european deposit insurance scheme. as part of these negotiations, further qualitative risk reduction can be envisaged in three areas. first, by harmonising

- makers are effective in using macroprudential tools to constrain excessive leverage and credit growth in the banking sector, the more likely it becomes that there will be excessive adjustments in the non - bank sector through leakages. for these reasons, the coverage of the macroprudential framework needs to be extended to the shadow banking sector. let me elaborate on one principle : macroprudential stress tests of the banking sector and their extension to non - banks. macroprudential stress tests this year, the ecb is taking part in the eba eu - wide stress testing in a fully - fledged capacity as microprudential and macroprudential supervisor. this capacity is collectively shared with the national competent institutions of the countries in the single supervisory mechanism. the macroprudential policy responsibilities have added a new dimension to stress testing that goes beyond the assessment of solvency of individual banks under a baseline and adverse scenarios. macroprudential stress tests should provide, in association with the projected scenarios, indicators to measure and predict the overall level of systemic risk, the position of the economy in the financial cycle and consequently the adequate stance of macroprudential policies. differently from supervisory exercises where results are expressed in terms of capital shortfalls or no additional capital requirements by bank, macroprudential stress tests might show that capital positions are either insufficient to preserve financial stability of the system or, in different circumstances, are excessive for the system as a whole requiring easing or release of macroprudential measures. only with this type of macro stress tests can we reach conclusions about the stance of macroprudential policy. this concept of macroprudential stress tests, which have to be top - down exercises, requires that we go beyond the traditional approach of microprudential capital exercises. 10 these further requirements consist of an integrated approach between micro and macro components which encompass primarily four main aspects : ( i ) a dynamic approach that includes consideration of the bank ’ s reaction to the scenarios ; ( ii ) a comprehensive two - way interaction between banks and the real economy ; ( iii ) the assessment of contagion effects stemming from interconnectedness among financial institutions, including non - banks in the shadow banking sector ; ( iv ) finally, the analysis of the interaction with other non - financial sectors that are relevant for banks ’ risk management. let me dwell upon these four points, which are being addressed at the ecb. dynamic approach including the bank ’ s reaction to the scenario