however, if some banks cease to pursue certain types of activity, in particular larger banks which have more options with regard to the reorganisation of their activities, the current turmoil could create opportunities for competitors to enter new markets in search of new customers. consequently, the level of bank competition could increase considerably in the coming months and this could benefit the end customer. it is still too early to predict which of these effects will prevail in the coming months. the situation differs greatly across countries, sectors and institutions. the most recent data on credit conditions indicate a further increase in the cost of financing for non - financial corporations, particularly for debt instruments, i. e. excluding financing through the stock market. although the overnight rate remained practically unchanged between june and september 2007, short - term bank interest rates on loans to corporations increased by around half a percentage point in the euro area, and by a similar amount in italy. as regards long term interest rates, market rates fell by around half a percentage point between june and september, but long - term rates on bank loans increased by 15 to 30 basis points. the bank lending survey published by the european central bank at the end of september indicates that conditions for credit to corporations have become more restrictive as a result of the market turbulence. this tightening seems to have been more pronounced for larger corporations, and this is in line with the evidence available for the united states and the united kingdom. nevertheless, the fact that the cost of bank financing has increased more than total financing costs, which also include market financing, might suggest that credit conditions have become on the whole less favourable for corporations that are more dependent on bank credit, in particular small and medium - sized corporations. as regards the reasons for differing attitudes among banks with respect to credit activity, the bank lending survey provides evidence of a certain reappraisal of expectations regarding growth, both in general and at sectoral level, as well as the cost and availability of financing for banks, which are at the heart of the current market tensions. indeed, in response to a question added to the latest version of the survey, banks reported a perceptible worsening of their own financing conditions, not only with regard to the interbank market but also to all debt instruments and all maturities. despite the less favourable supply conditions, demand for credit and credit actually granted remained very dynamic into the third quarter of 2007, not only in the euro area as a whole but also in italy. this suggests that, overall, it cannot

surplus country in the euro area, germany. the ecb has acted, on a temporary basis, as a substitute for decentralised markets within the euro area. 9 as a by - product of these developments, so - called target2 imbalances have emerged. you will recall that target2 is a recording, clearing and settlement system operated by the ecb. national central banks in the euro area – members of the eurosystem – can build up claims vis - a - vis target2 over time. target2 is only a mirror of the underlying economic and financial imbalances : with a properly functioning interbank market, no claim would appear in target2, and the underlying economic situation would be exactly the same. constraining the flow of funds through target2 would address a symptom of the crisis without tackling its causes. it would hamper the freedom of capital movements as well as the smooth operation of payment systems, which is a basic task of the eurosystem as mandated by its statute. the current situation is not a viable risk - sharing arrangement for the long run. today, risksharing between euro area countries occurs to a considerable extent through public institutions and only to a limited extent through markets. this has constituted an optimal response to a temporary malfunctioning of markets. however, financial integration remains key to the efficiency and competitiveness of the european economy. the eu is a marketbased economy and markets must play the primary role in allocating economic resources across emu countries, sending price signals and monitoring the associated risks under adequate supervision. risk - sharing in the euro area after the crisis let me discuss now what i see as the challenges ahead of us : how to restore and strengthen market - based risk - sharing mechanisms between euro area countries, and how to make euro area countries more resilient to adverse economic shocks in the future. see also merler, s. and pisani - ferry, j., “ sudden stops in the euro area ”, bruegel policy contribution, 2012 / 06. bis central bankers ’ speeches i would like to break this discussion down into four areas. first, the rest of the euro area – or the rest of the european union – should continue to support the adjustment process of euro area countries that had to address an unsustainable fiscal deficit or current account deficit – provided that there is adequate conditionality and monitoring. currently, the rest of the euro area is accompanying – via the efsf