But their number will depend on the basket of deliverables of the futures contracts and how those baskets are defined. The alternative would be for a group of different countries’ bonds to be traded interchangeably, but that seems an unlikely outcome. On the OTC markets, the last 18 months has seen the proliferation of trades based on changing perceptions of the likelihood of convergence for the traditionally high-yielding countries and trades based on the differential yields of French and German government bonds. If I might embark on a regulatory diversion here, just for one moment, we at the Bank expect those banks involved in convergence trading to undertake rigorous stress testing of their portfolios to assess the market risk they are running on open positions. That testing should also shed light on the potential for changes in their credit risk - for example if an OTC contract is moving further in the money due to a market movement, the bank would become more exposed to its counter-party. We believe that the credit exposure implications of stress testing should be taken seriously too and are encouraging banks as best practice to do that. In our view not enough institutions do so yet. After EMU, one would expect to see the elimination of exchange rate risk narrowing yield differentials in the bond markets. With exchange rate risk removed and a single monetary policy in operation, national bond yields will differ principally because of differential default risks and differences in market liquidity.
Benoît Cœuré: Why the euro needs a banking union Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the conference “Bank funding – markets, instruments and implications for corporate lending and the real economy”, Frankfurt am Main, 8 October 2012. *  *  *  I would like to thank Carmelo Salleo for his contribution to the speech. I remain solely responsible for the opinions expressed herein. Introduction Ladies and gentlemen, It is a great pleasure to be here with you this evening as part of this conference. I firmly believe that good research underpins policy choices and, as you know, the European Central Bank (ECB) is very committed to carefully conducted, high-quality analysis as the bedrock of its decision-making. Bank funding has been the focus of policy-makers’ concerns for the past few years, ever since the collapse of Lehman Brothers, which brutally reminded us all of the systemic dimension of liquidity and funding risk. Such a cataclysmic event elicited a host of responses, ranging from central bank interventions to prevent a meltdown of the financial system to the design of new regulations to limit risk-taking by financial institutions. The shock was global – and the response has been global. However, much work still needs to be done, so I welcome opportunities such as this conference to gain a better understanding of the dynamics and determinants of bank funding and of their implications for the financial system and the real economy.