In response, the ECB has announced the Outright Monetary Transactions (OMTs) – interventions on sovereign bond markets to repair the transmission channel when the level of spreads hampers monetary policy transmission and reflects market’s perception that the single currency might break up. OMTs would be implemented to the extent that they are warranted from a monetary policy perspective for countries under an EFSF/ESM macroeconomic adjustment or precautionary programme, as long as programme conditionality is fully respected. IMF involvement will also be sought. OMTs would not be carried out while a given programme is under review, but they would resume after the review period once programme compliance has been assured. The announcement of the OMTs has reduced concerns about the materialisation of destructive scenarios. But it is essential that governments continue to implement the necessary steps to reduce both fiscal and structural imbalances and proceed with financial sector restructuring measures. The structural reason that the transmission channel is malfunctioning is the tight link between sovereign and bank funding conditions. The risk that banks’ balance sheets would be contaminated by sovereign risk was highlighted at an early stage by Barry Eichengreen and Charles Wyplosz (1998). 1 If banks are to transmit monetary policy impulses evenly, they need broadly similar funding conditions. However, if the ultimate responsibility for the stability of the banking system falls within the domains of individual sovereigns, clearly the two are linked and when one of the two becomes riskier, this risk is transmitted to the other.
Conclusions Let me conclude by stating once more that for monetary policy to work we need an integrated banking system, and to have an integrated banking system we need it to be supervised across the euro area as a whole, which will make it possible to be backstopped by the euro area as a whole. This is the vision put forth in the Four Presidents’ Report, this is the commitment made by the euro area governments, and the ECB supports it wholeheartedly. The monetary and the banking union are symbiotic, and they are the logical extension of the Maastricht Treaty, both in historical and political terms. I look forward to a stimulating discussion and wish you a very successful conference. BIS central bankers’ speeches  5