certainty when a firm gets into trouble and they ensure that failure is orderly ; and macroprudential policy looks beyond individual institutions and deploys tools to target systemic risks. a recovery and resolution regime is particularly important for central counterparties ( ccps ), which have become critical hubs in the financial system. legislation in this area is progressing, and the esrb continues to identify areas of refinement to better address macroprudential considerations. 21 this includes the need for cooperation and coordination between resolution authorities for banks and ccps, as distress of a ccp would typically be triggered by distress in one or more banks that are clearing members of the ccp. creating a harmonised recovery and resolution framework for the insurance sector across the eu is also important. ordinary insolvency procedures may not always be consistent with policy holder protection and financial stability objectives. this means that they may not suffice to manage the failure of a large insurer or the simultaneous failure of multiple insurers in an orderly fashion. for example, romania developed a comprehensive recovery and resolution framework of this kind following difficulties faced by two large insurers in 2014 and 2015. and the netherlands and france are in the process of developing such frameworks after experiencing the near - failure of some financial conglomerates during the global financial crisis. 22 addressing systemic risks requires macroprudential tools that public authorities can use. 3 / 5 bis central bankers'speeches reflecting this, the esrb recently noted that there is a need to establish a comprehensive macroprudential toolkit beyond banking, which to date is lacking. 23 of course, specific tools still need to be developed. the esrb has done preliminary work assessing what those tools might be. one example is the macroprudential use of margins and haircuts, on which i updated the european parliament earlier this year. 24, 25 conclusion let me conclude. much has been achieved since the global financial crisis. in particular, banks in europe are more resilient and the banking union has advanced. moreover, authorities have the mandates and tools to tackle risks in the banking sector and are using them. these improvements have created a financial system that poses fewer risks to the real economy. at the same time, work remains to be done. authorities need to watch out for blind spots, where risks can build up unnoticed, and use the tools at their disposal. and legislators need to be mindful that authorities require a broad range of tools to be able to tackle

##ctuate, they are set in currency markets according to the demands and supplies of forward - looking traders, and they can be very volatile, often overshooting long - term values. this volatility can destabilize trade and impart significant uncertainty to international lending. borrowers may borrow in international markets expecting to repay at one exchange rate, and when the bill comes due, the exchange rate may differ, by a lot. lenders and borrowers can both hedge, but hedging is costly, and institutions providing this hedge can go broke. • financial institutions. financial institutions engage in what is known as maturity transformation. they take deposits from you and me, which deposits can be redeemed any time we take out our check book, and make long - term loans to mortgage borrowers and businesses. there are fantastic efficiencies in this process - consumers can get higher returns on their saving, and business can borrow and invest in productive equipment. indeed, banks and other financial institutions play the same role in allocating domestic saving to its best uses that the international capital market plays for international capital. but as with capital flows, there are risks. if the banks ’ loans go bad, the institution is in trouble and may not be able to redeem deposits. within a country ’ s borders there are often institutions such as deposit insurance to protect savers, but internationally the risks can be greater. given that banks are involved in the domestic saving, investment process, it is not surprising that they have become heavily involved in the international saving, investment process. in general this process too has led to worldwide efficiencies, but here too there are risks. in japan, for example, the banks have been hurt by a massive decline in real estate and other values, which have put many nonperforming loans on their books. in korea and indonesia, the banks were hurt by the foreign currency exposure of their borrowers. • incentive effects. incentive effects are always important in economics, generally complicating the analysis of policy measures. nowhere is this as true as with international capital flows. one incentive problem involves what is known as moral hazard. suppose national governments do intervene to protect the safety and soundness of banks. that intervention might seem sensible, but it could inspire more risky lending by the banks, to let the government pick up the tab if things go bad. a second problem involves unilateral default on loan payments or currency obligations. defaults would