assessments necessarily contain a degree of uncertainty, policymakers need to continuously monitor how new regulations are actually affecting incentives in practice, and adapt them accordingly where unintended consequences appear. we have seen this, for example, with the liquidity coverage ratio. another example is securitisation. it is now widely acknowledged that regulatory initiatives aimed at preventing a replay of the sub - prime crisis may have indiscriminately affected all abs, including simple and transparent structures that can play an important role for sme financing. in line with on - going work at the international level, this is now in the process of being addressed through the amendments to the solvency ii ( for insurers ) and capital requirements directives ( for banks ), recently published by the commission. as part of this agenda, we also need to ensure that regulations are mutually consistent. for example, a well - functioning sme abs market requires banks that can market and trade securitised products. this depends in turn on their capacity and willingness to absorb temporary demand - supply imbalances. thus, we should be careful to ensure that new regulations, for instance aimed at separating the banking and trading arms of universal banks, do not have negative consequences for market - making activities that are not justified by significant risks, in particular in less liquid markets. in all these ways – cyclical, legacy, regulatory – setting the right microeconomic incentives for the banking sector can have significant macroeconomic consequences. they are therefore areas where, if we want to sustainably repair the banking lending channel, the attention of policymakers is warranted. ensuring that banks have the capacity to lend if the first aim for policy is ensuring that banks have the incentives to remain engaged is economically important lending, the second is ensuring that they have the capacity to do so. a pre - condition for this is that banks are appropriately capitalised, as i have already discussed. but what also matters is the landscape of the banking sector – that is, whether the banking sector is sufficiently efficient and diversified to ensure a stable supply of credit. according to some indicators the european banking sector is characterised by over - capacity relative to the size of the market. for example, the herfindahl - hirschman concentration index for the euro area currently stands at around 700 ; as a general rule, a figure below 1000 signals low concentration. 8 this suggests that one factor in difficulties facing the sector is that it is not operating at the efficient frontier – and consequently,

up inflation to levels not seen since the introduction of the euro. in response, we started a gradual reduction in our asset portfolio and we increased our policy rates by a total of 450 basis points. our strong reaction was key to prevent a deanchoring of expectations and to curb inflation. in terms of economic activity, the slowdown has so far been contained and gradual. however, the incoming data indicate that the future remains uncertain, and the prospects tilted to the downside. the inflationary shock that we were confronted with following the energy crisis has been particularly challenging : it occurred in an already difficult environment, with the world economy recovering from the pandemic and global supply chains still disrupted. furthermore, supply side shocks are particularly difficult to manage using monetary policy instruments. in this context, sustainable and investment - oriented fiscal policies aimed at promoting the energy transition, strengthening the resilience of supply chains and increasing euro area productivity are supportive of our price stability goal. structural reforms and investments to enhance the euro area's supply capacity can help reduce price pressures in the medium term. in this regard, we very much welcome the agreement on the eu's economic governance framework reached a few weeks ago. it is a powerful signal to markets as it reduces uncertainty about fiscal rules in the eu. the reformed framework will help strike a balance between sustainable public finances and sufficient debt reduction on the one hand and room for reforms and investment on the other, while supporting 3 / 4 bis - central bankers'speeches countercyclicality of fiscal policies. achieving this balance turned out to be less straightforward than we might have hoped. it is now crucial that the new fiscal framework is implemented properly and without delay. thank you for your attention. 4 / 4 bis - central bankers'speeches