I would also like to share with you some thoughts on each session, which – far from pre-empting future discussions – aim to spur the debates with our audience. The first topic today concerns the challenges of conducting monetary policy with large public debts. Numerous questions arise including fiscal dominance, the trade-off between debt sustainability and fiscal discipline, multiple equilibria and financial instability. First, I will comment briefly on how high public debt increases the risk of fiscal dominance on monetary policy. Low interest rates may very well be justified by specific business cycle conditions or risks of undershooting the inflation target. They also facilitate the sustainability  BIS central bankers’ speeches  1  of higher public debts. Hence the need to ascertain whether risks related to public debt sustainability considerations might in turn jeopardize price stability. Another paramount risk of very low interest rates is to entertain the illusion that governments can continue to borrow rather than make difficult and yet necessary choices and indefinitely put off the implementation of structural reforms. Such risks are very real in the euro area. Very high public debts are also a factor of financial fragility. Market participants therefore expect central banks to intervene on public debt markets to safeguard financial stability. Indeed, in extreme circumstances a central bank should mitigate the effects of confidence shocks on sovereign yields by purchasing government bonds.
Admittedly, our objective as regulators remains relatively simple: it should be primarily to ensure that financial institutions, infrastructures and markets properly do their job of smoothly and efficiently channelling savings into productive investments. Yet our task is difficult as finance constantly evolves as a result of technological advances or as an answer to regulatory changes. This should prompt us to be both resolute and cautious in dealing with many questions such as whether there is an optimal mix of bank and market financing. The financial crisis has indeed revealed at least three major failures of our financial systems, be they bank or market oriented: excess leverage, excess complexity and excess opacity. Corrective actions have been implemented in these three areas. First, over the past few years, Basel III and various national or regional initiatives have led to a sizeable recapitalization of the banking system and especially SIFIs [systemically important financial institutions]. In the euro area, the Comprehensive Assessment of the balance sheets of 130 major banks shows how much progress has been made. Second, major reforms have been undertaken in order to facilitate the orderly resolution of large and complex financial institutions, thus providing better incentives ex ante to these large financial conglomerates. Such progress can be seen both in Europe, where the Banking Union is a major step forward, as well as abroad. Last, the scope of regulation has been extended to products and markets that remained too opaque in spite of their systemic relevance, such as some major classes of OTC derivatives.