2 The three lines of defense model creates a set of layered defenses that align responsibility for risk taking with accountability for risk control and provide effective, independent risk oversight and escalation. In the three lines model, the assignment of risk management roles is clear and comprehensive in order to prevent gaps,  1  https://www.newyorkfed.org/aboutthefed/fedpoints.html. 2  IIA Position Paper: The Three Lines of Defense in Effective Risk Management and Control, January 2013. BIS central bankers’ speeches  1  ambiguities, or overlaps in responsibility. More specifically, the business areas are the first line of defense, independent risk management units are the second line of defense, and internal audit is the third line of defense. In the Bank, the first line of defense is comprised of the business areas that execute and support the execution of the Bank’s mission. These first line units are responsible for both the operational activities that result in risk as well as control of the resulting risks. The first line “owns” its risk in the sense that it is accountable for both positive and negative outcomes and is empowered to manage the distribution of outcomes. At its core, the three lines model recognizes the strong incentives for effective risk management created by aligning accountability and responsibility. In other words, from the perspective of the first line, there is “skin in the game,” and risk management is not viewed as someone else’s problem.
And this is why, as I have said many times, I believe there is a strong case for governance of structural reforms to be exercised jointly at the euro area level: to help each country to achieve the necessary level of resilience; and to ensure that they maintain that resilience permanently. 4 Since structural reforms in any euro area country are a legitimate interest of the whole union, there needs to be stronger ownership of reforms not just at the national level, but at the European level as well. Several countries have however made significant progress with structural reforms during the crisis, and we can already see how this has altered the relationship between inflation and unemployment. Various estimates of the euro area Phillips curve show that, while the slope has varied over time, it has steepened in recent years. In particular, there is evidence that inflation has become increasingly responsive to cyclical conditions in countries that have reformed their product and labour markets, such as Spain 5 and Italy 6. Raising potential growth Besides this issue of resilience, as the central bank of the euro area we also have another, equally direct interest in structural reforms. This is related to their effect on growth – or more specifically, the challenges posed by a period of low potential growth. International institutions currently estimate potential growth to be below 1% in the euro area, compared with above 2% in the US (Chart 3).