with national authorities or at the request of the national supervisory authority. although aimed at revising the institutional arrangements of the euro area, the ssm is not a closed system. it is open to those national competent authorities of non - euro area member states that intend to participate by entering into a close cooperation with the ecb. once a member state enters into a close cooperation, national competent authorities will participate on equal footing as regards supervisory decisions, but will equally have to adhere to the guidelines and instructions issued by the ecb. enlarged participation in the ssm is a great opportunity for setting a level playing field in supervisory practices across the eu. at the same time, a series of conceptual questions need to be addressed. for one, it is hard to imagine that countries not participating in the european stability mechanism ( esm ) might act as a financial safety net for troubled but solvent banks, in the event that a privately financed resolution fund is not yet adequately funded. the next steps the establishment of the ssm represents a great opportunity for financial integration in europe. let me now turn to the next steps in the establishment of the ssm. first, the swift adoption of the ssm regulation is essential. definite plans are crucial in order to uphold the current momentum of the stabilisation of the euro. the general expectation is bis central bankers ’ speeches that the ssm will be established early this year, with an effective operational start 12 months later. second, the design of a supervisory model, including the allocation of tasks between centre and periphery is critical for the success of the ssm. in this regard, work is already under way by the ecb in cooperation with national competent authorities – subject to the final legal wording. third, the ssm will need to carry out a comprehensive review of the banks that fall under the direct supervision of the ecb. as set forth by the regulation, this exercise should include elements of an asset quality review as a basis for a thorough solvency analysis. this analysis should also be instrumental in identifying potential legacy problems. it is important that the financial clean - up of these legacy problems will be undertaken by the responsible member states and not by the esm and certainly not by the ecb. just like an insurance policy, the ssm can cover future risks. past omissions must be resolved by those who are accountable for them. this does not rule out interim solutions involving actions by the srm and ( privately financed ) resolution fund as well as by the

by capital - constrained banks. operationally, this is typically done by feeding our stress test results into some of our largescale macro models that include an active banking sector and thus can adequately capture the real - financial linkages. nonetheless, further modelling enhancements are warranted in this fourth building block, and for this purpose we will continue to closely monitor the progress in the tools developed in workstreams 1 and 3 of mars. having described the various building blocks, let me furthermore emphasise that our framework is based entirely on publicly available consolidated bank - level data ; no supervisory information is employed in our set - up. bis central bankers ’ speeches our analytical framework should also not be mistaken for the constrained “ bottom - up ” approach adopted by the eba for its annual eu - wide stress test. the eba stress testing exercise is carried out at the bank level and applying granular bank level data only available to the banks and their national supervisors. compared with supervisory stress tests carried out between banks and their home supervisors, the eba bottom - up stress test is “ constrained ” in the sense of using a common scenario across all banks and to a large extent also relies on common methodologies. bottom - up and top - down stress tests should not be directly juxtaposed, as a one - to - one mapping of their results is not possible. rather they should be seen as complementary tools to assess the resilience of the financial sector ; they are characterised by different strengths and weaknesses. importantly, although top - down stress tests are far from perfect and suffer from many deficiencies, they are a useful tool to challenge the more granular bottom - up approaches and especially to detect outlier responses by individual banks in the latter case. 3. the use of macro - prudential policy instruments in the single market i would like to conclude by turning to the design of policy instruments that authorities may use to address the risks identified by various analytical tools. as a consequence of the lessons learned from the crisis, the focus of financial regulation has gradually shifted towards a macro - prudential approach, a key element of which is the establishment of authorities with macro - prudential mandates at both the national and the international level. in the eu context, the esrb has been operational since the beginning of this year. the esrb is currently working on developing a macro - prudential toolkit of policy instruments that authorities can use to address systemic risks. moreover, the basel iii regulatory framework