Milesi-Ferretti (2010), “The cross-country incidence of the global crisis”, CEPR Discussion Paper, No. 7954. 2  See H. S. Shin (2012), “Global banking glut and loan risk premium”, mimeo, Princeton. 3  See V. Acharya and P. Schnabl (2012), “Do global banks spread global imbalances? The case of assetbacked commercial paper during the financial Crisis of 2007-09“, NBER Working Paper, No. 16079. 4  See V. Acharya, P. Schnabl and I. Drechsler, “A tale of two overhangs: The nexus of financial sector and sovereign credit risks”, 15 April 2012. 2  BIS central bankers’ speeches  financing in foreign currency of long-term investments (maturity mismatch) and insufficient prudential standards leading to excessive risk taking and rent seeking behaviour. Unfortunately the warnings were not taken seriously until the issues and risks materialised first with the depreciation of the Thai baht in July 1997. Perhaps we have not learnt enough from the past! As growing financial market tensions made the financing of these deficits ever more difficult, the last and most unexpected layer of the iceberg – namely the so-called “redenomination risk”, the possibility of a break-up of the euro area – came to the surface in the middle of last year. By that time, the sovereign spread of high-yield euro area countries relative to other euro area countries had widened to an exceptional extent, hardly justified by fundamentals and fundamentally incompatible with a well-functioning monetary union.
The Member State concerned will have to prepare a corrective action plan with a roadmap and the deadlines for implementing adequate measures. Note that this process may end up in sanctions up to 0.1% of GDP, in case of non-compliance by the affected Member State. The procedure for identifying and correcting macroeconomic imbalances is very important and addresses a concern that the ECB has voiced repeatedly in the European context. Also in this case it will be important to implement it fully, while being aware of the unavoidable difficulties, also of an analytical nature, of identifying relevant imbalances ex ante. Macro-prudential policies. Turning to macro-prudential policies, in line with other jurisdictions the EU has equipped itself with a body whose task is to recommend actions to reduce systemic risk in the EU financial sector, the European Systemic Risk Board (ESRB), which is closely associated with the ECB. While the ESRB cannot take direct action, its advice and recommendations carry great weight. In addition, the Single Supervisory Mechanism (SSM) – which I am about to describe in a moment – will assign micro-prudential powers to the ECB for the banking sector of those countries which adhere to the SSM. The ESRB will remain responsible for macro-prudential issues in the EU as a whole and for the whole financial sector (i.e. beyond banks). Financial market union. Let me now turn to plans to establish a financial market union in the euro area.