broader than that. non - bank financial entities such as investment funds, insurance companies and pension funds also take on risks and can amplify the wider financial cycle. so it is more important than ever that macroprudential policies are broadened to cover these non - bank financial entities as well. financial stability and macroprudential policy in the economic and monetary union the euro area ’ s ongoing economic recovery faces renewed global headwinds that are weighing on the economic outlook. uncertainties related to the rising threat of trade protectionism, vulnerabilities in emerging markets and geopolitical factors, including those related to brexit, make the economic environment more challenging. 3 in this environment, the ecb ’ s accommodative monetary policy is necessary for inflation to remain on a sustained path towards levels that are below, but close to, 2 % over the medium term. 4 at the same time, the environment indicates that risks to economic growth are tilted to the downside. 1 / 6 bis central bankers'speeches this reinforces the need to strengthen the balance sheets of our financial and non - financial firms to withstand any shocks that may occur. fortunately, banks have done exactly that over the last decade. capital ratios of euro area systemic banks increased from 10. 4 % at the end of 2010 to 14. 3 % by the end of last year ( in terms of common equity tier 1 ). this increase has been facilitated by the general recovery, supported by the ecb ’ s accommodative monetary policy, and is a reaction to increased market pressures and additional macroprudential requirements. indeed, macroprudential policy aims to maintain a strong and stable financial system. it has become a crucial complement to the ecb ’ s monetary policy which is geared towards achieving price stability. while the current accommodative monetary policy is supporting the economic recovery, it may generate undesired side effects in the form of excessive risk - taking. macroprudential policy can counter these excesses with its targeted toolkit. by imposing additional requirements, it can restrain lending to excessively risky borrowers or create the necessary loss absorption capacity in specific sectors or countries. institutional set - up of macroprudential policy within european banking supervision this more targeted application of macroprudential policy to individual countries is also reflected in its institutional set - up. national authorities are first in line to counter emerging systemic risk in a timely manner by deploying the available

estate holdings. their exposure to these assets has reached almost 10 % of total investment and is expected to rise further. 14 as some of these assets are highly illiquid, the portfolio shift towards these assets may also increase insurers ’ liquidity risk beyond credit risk. but this is only one example, where the credit risk on non - banks ’ balance sheets is coupled with liquidity risk. in fact, liquidity risk is particularly an issue for some bond and equity funds that invest in less liquid assets, while offering shortterm redemptions to their investors. these funds are vulnerable to sudden changes in investor sentiment, so - called “ run risks ”. some recent cases were a reminder that investors in less liquid funds might indeed run if they fear deterioration in asset quality or liquidity. 15 while recent instances happened in a generally stable market environment and did not have systemic repercussions, liquidity problems might have been larger in an adverse market environment and with many funds affected simultaneously. if anything, the liquidity mismatches observed in bond and equity funds call for greater scrutiny of market practices and a possible review of the regulatory framework to ensure the sector ’ s resilience also in stressed market conditions. more generally, through increased risk - taking and leverage, non - banks may currently be contributing to the cyclical under - pricing of risks and the amplification of asset prices. if these risks were to unwind in a disorderly manner, this could lead to funding flows drying up and affect the funding conditions of the real economy more broadly. moreover, distress in the non - bank sector could spread to the banking sector as well, due to the strong links between the two. for instance, euro area non - banks hold over one quarter of bonds and shares issued by euro area banks. i have argued in the past that, from a regulatory perspective, we need to establish at least two lines of defence for evolving risks. first and foremost, the non - bank financial sector needs to have solid prudential standards. but this will not be sufficient if risks evolve more broadly and across institutions. we will also need an extension of the macroprudential toolkit to the non - bank financial sector, in order to provide the authorities with the means to address risks at system level. while the macroprudential framework for banks is relatively well developed and provides authorities with tools to address cyclical and structural systemic risks, the framework for nonbanks is still in its infancy and