 Good afternoon, everyone. I hope you are enjoying the conference and that it is useful event for all. I'm going to make some remarks about two aspects that are very important in what regards the development of a capital markets union. I will center. My statement on that aspect. Well, first of all, a well-functioning capital markets are particularly beneficial for an area like the euro area if they lead to what economists call financial risk sharing. At the same time, however, the process of financial integration and capital markets in development that can enhance such risk sharing may be accompanied by the emergence of new financial stability risks that could undermine the envisaged benefits. Therefore, in order to reap the benefits of a true capital markets union, we need to provide the conditions under which capital markets can flourish while at the same time making sure that regulatory and supervisory measures keep financial stability risks in check. In order to make progress in how this balance can be struck, I shall first review the case for cross-country risk sharing via capital markets, review the evidence for the euro area, and consider how it can be enhanced. Next, I shall discuss the threats to financial stability that can be associated with complementing a more bank-based financial system like the European one with strengthening capital markets. Third, I shall let you know my views about which macro-prudential policy reforms should be considered. One of the main reasons why financial integration is beneficial is that integrated financial markets help support constant consumption growth in goods and in bad times. Consumption smoothing between countries, also known as risk sharing, can increase welfare by edging consumption against country-specific risks. In theory, in a perfectly integrated world, full risk sharing can be achieved where consumption in regions or countries grows at the constant pace and is insensitive to local fluctuations in income and wealth. Normally, high levels of risk sharing are achieved across jurisdictions within a country or within a federation that represents a functioning political, economic and monetary union. For example, evidence suggests that three-quarters of shocks to the per capita gross products of individual states in the United States are smoothed with about 40% smoothed by insurance or cross ownership of assets, a quarter smoothed by borrowing or lending, and one-eighth smoothed by the federal transfers and grants. In other words, the contribution of markets is five times higher than other contributions. Regions within federations in Europe exhibit high levels of risk sharing too. For example, in pre-unification Germany, virtually all shocks to per capita state gross products were smoothed. However, due to less developed capital markets than in the United States, the largest portion, 50%, was smoothed through the federal tax transfer and grant system, and 36% were smoothed through financial markets. For countries in a monetary union such as the Euro area, risk sharing is particularly important because the single monetary policy is unable to address asymmetric shocks. With disjoint business cycle across countries, idiosyncratic shocks to EMU member states need to be insured through robust market or fiscal mechanisms. Reducing the volatility of aggregate consumption through various risk sharing mechanisms can provide significant welfare gains for countries hit by specific shocks. And by reducing internal divergences and facilitating macroeconomic adjustment, risk sharing can be beneficial for the monetary union as a whole. It is quite clear at this point that in the foreseeable future, a number of mechanisms that have the potential to improve risk sharing across countries will not progress quickly in Europe. For example, labor mobility will likely remain below levels achieved in common language federations such as the United States or Germany. Similarly, building a European supranational system of taxes and transfers to mimic the United States or the situation within some European countries is not a realistic prospect at present. Finally, the rules on fiscal deficits imposed by the stability and growth pact will continue to set limits on national governments for smoothing large shocks. For these reasons, it is more pressing than ever to boost Europe's risk sharing potential through financial market mechanisms. First, cross-border holdings of productive or financial assets can provide members of a currency union with insurance against idiosyncratic shocks. Second, well-functioning credit markets can contribute to smoothing consumption against relative income fluctuations, especially if most cross-border lending takes the form of direct lending to households and firms rather than of wholesale lending and borrowing in interbank markets as it happened before the crisis. The conclusion is that greater progress in risk sharing in the Euro area would require significantly more developed and integrated capital markets, particularly equity markets, as well as more banks operating at a pan-European level. Quantitatively, the risk sharing benefits of integrated financial markets can be large. By far the most important source of risk sharing are cross-regional and cross-border asset holdings, that is, various forms of equity holdings and firm ownership claims. Financial integration in Europe was expected to be facilitated greatly by the introduction of the common currency. However, in the years after the introduction of the Euro, progress in capital markets and credit market integration has been uneven. At present, the cross-border ownership of assets in the EU is still limited, despite the fact that the single currency in the Euro area reduced some of the information barriers and transaction costs. Corporate financing through bonds and equity markets is much more limited in Europe, too, with banks the undisputed primary source of funding for firms. For all these reasons, the overall contribution of markets to risk sharing can, on average, be also somewhat limited. This chart that you see over there demonstrates the contribution of various factors to risk sharing over time. In fact, it updates some previously known analyses of the different contributions in Europe to a more recent period. It shows that after the adoption of the Euro, smoothing through factor income flows resulting from cross-border ownership of assets increased substantially. That's the blue curve that you see there. The notable exception is a brief period in the early to mid-2000s when capital markets smoothed between 30 and 40 percent of country-specific shocks to GDP. The contribution of capital markets declined substantially during the financial crisis, and especially during the sovereign debt crisis. The contribution of credit markets has been lower, and it became even negative during the financial crisis when the European banking sector was particularly heavily hit. At present, and that's the red curve you see there, at present almost 80 percent of the idiosyncratic shocks to a country's economy remain unsmoothed, and changes in relative prices contribute the most to the risk sharing. As you see also there with the black curve, the regime of transfers and grants within and across member states is quite negligible around zero. So that's the situation and its development through time with this period in near 2000 that bodes some hope for what may happen in the future if indeed we achieve a capital markets union. So to speed up the process of capital markets and credit markets integration, two initiatives have emerged in Europe, the banking union and the capital markets union. The banking union aims at a sustainable and deep integration in banking markets through single supervision, joint resolution, and common deposit insurance. Risk sharing is particularly fostered through direct cross-border bank lending, emphasizing the importance of the European Commission's recent initiative on fostering retail financial services. The CMU in turn aims at mobilizing capital by creating deeper and more integrated capital markets. Ideally, the CMU should achieve the completion of the single market for capital within a common currency union. This completion is vital to reap the full benefits of risk sharing across borders and not be limited by border effects from past institutional legacies. Overcoming these border effects is to be achieved through regulatory and non-regulatory actions, including the harmonization of key legislation related to financial products. While the regulatory and non-regulatory actions will be instrumental in capturing market-provided risk sharing, deeper capital markets have a particular high potential to smooth risks across national borders. Consequently, we need an ambitious capital markets union, which calls for a roadmap in terms of goals and milestones to be achieved. Broad objectives such as capital markets development, deepening financial integration, and achieving risk sharing should be at par with specific proposals such as facilitating funding for corporates in general and for SMEs in particular. Key areas such as secretization, insolvency regimes, securities holders rights, and tax legislation need to be prioritized. All these are important to ensure equal treatment of users of capital markets across member states the very essence of a capital markets union. This brings me to the second part of my talk, where I would like to discuss the financial stability implications of enhanced risk sharing. Indeed, financial integration and the further development of non-bank financing may also create new financial stability risks. At a general level, greater integration can exacerbate the size and speed of cross-border contagion. International risk sharing and cross-border contagion can be two sides of the same financial integration coin. This explains why taking a macroprudential perspective on the financial system is extremely important for addressing potential new sources of systemic risk. With respect to the banking sector, the further development of capital markets increases competition and may incentivize banks to take on more risk to maintain profitability. To ensure that there are no unintended financial stability risks, we need to strengthen the European macroprudential regulatory toolkit for banks and the capital requirements directive and the capital requirements regulation. The European Commission's review of the CRR-CRD4 will provide an opportunity to review and complement the current macroprudential toolkit for banking at European level. It should entail, first, ensuring that instruments currently available are more targeted and overlaps are eliminated. Second, broadening the toolkit with additional instruments such as the net stable funding ratio, leverage ratio, loan to value, loan to income, and debt to service to income. Third, streamlining the process for notification or information procedures both in the EU and within the SSM by revising in particular Article 458 of the CRR that would benefit from simplifying the coordination mechanism to ensure that macroprudential authorities can decide and implement the measures in an effective, efficient, and timely manner. The single market is not in contradiction with macroprudential concerns that have to be addressed. Moreover, the strong growth of non-bank financing creates new risks in a part of the financial system that is much less regulated. In particular, the so-called shadow banking sector, perhaps a misnomer but very difficult to change it now, and in particular the investment fund sector has grown rapidly over the past few years. Between the end of 2009 and the first quarter of 2015, assets managed by investment funds other than money market funds almost doubled from $5 trillion to $10 trillion. Excluding valuation and reclassification effects, the sector has grown by 30%. Importantly, this rapid growth comes together with increased risk-taking. Funds have shifted their assets allocation from higher to lower rated debt securities, increased the average residual maturities of debt securities holdings, and continue to expand their exposure to emerging markets. In addition, the interconnectedness of the fund sector with the wider financial system and with the banking sector in particular, more widespread use of synthetic leverage and the increasing prevalence of demandable equity imply that the potential for a systemic impact would increase and should the investment fund industry come under stress. Therefore, I want to state that the financial regulatory reform has to be completed and extended through further efforts to contain risks in the shadow banking sector and to strengthen macro-prudential policies. Allow me to elaborate on three important aspects of this task, namely tools to address the excessive use of leverage by investment funds, tools to address liquidity risks, and the framework for macro-prudential margin and air cut requirements. As regards leverage in investment funds, we need to ensure that the use of leverage remains within acceptable limits. Highly leveraged funds can create and amplify systemic risk. When leverage is created through derivative exposures or ripples and securities lending transactions, margin calls or increasing air cuts on collateral can trigger a deleveraging by funds, and that's what is synthetic leverage, is the leverage created by the use of derivatives and this type of transactions. Notably, such a margin spiral can even occur when funds are closed and investors cannot redeem their shares at short notice. To the extent that many funds are forced to sell assets in less liquid markets and at a substantial discount, these can reinforce price falls in financial markets and become a systemic risk. In order to curb the use of leverage by investment funds in the EU, it is useful to distinguish between funds that are subject to the regulatory framework of the undertakings for collective investment in transferable securities, USITs, and those subject to the alternative investment fund managers directive. In principle, all USIT funds have restrictions on the use of balance sheet and synthetic leverage. In practice, however, funds applying more complex investment strategies can calculate their use of leverage based on the commitment method that allows some netting or a value at risk approach resulting in a less stringent limit for synthetic leverage. Therefore, it is important that we examine the use of leverage by these USIT funds and address any existing possible shortcomings. As for the alternative investment funds that operate under the other directive, there are no hard limits for the use of leverage. Importantly, national competent authorities do have the power to impose leverage limits under the alternative investment fund managers directive, but no authority has exercised this power so far. In order to put this potentially powerful macro-prudential tool into practice, we need to develop an operational framework at the EU level. To further these tasks, let me highlight three important issues. Indeed, I point out that looking into numbers for these alternative investment funds, we can detect in gross terms very high synthetic leverage numbers, which in a crisis, as it happened in the recent peak of the financial crisis, can indeed lead to T-stress in institutions that have excessive synthetic leverage. The first point I wanted to make is that the use of leverage within the banking system and the existing leverage ratio for banks may not always be a useful benchmark for the fund industry. Unlike bank capital, investment fund shares of open-ended funds can be an unstable source of funding when investors can withdraw their equity at short notice. Second, an assessment of liquidity risks by funds should be part of the assessment of leverage. Indeed, the risk of redemptions by investors on open-ended funds can be closely related to the use of leverage. Third, the framework should have a clear macro-prudential perspective, providing authorities with the guidance and flexibility to set limits for groups of funds where necessary to address a too-many-to-fail risk. Even if investment funds are small and does not too big to fail, they may be systemic, as I heard, and pose a risk to financial stability due to common exposures to the same type of shock. Next to tools addressing excessive leverage, and as we all know, excessive leverage is always a good indicator of financial crisis to come, and that happened also in these crises, so that as the system changes its structure, we have to have means at least to monitor what is the overall leverage of the financial system. And for that, we need more reporting data from other institutions, rather than only banks. Next to tools addressing excessive leverage, we need to develop tools targeting liquidity in non-bank financial institutions. With regard to investment funds, liquidity spirals remain always a risk. Such spirals can be triggered if funds were to be confronted with high redemptions or increased margin requirements, as these could result in forced selling on markets with low liquidity. To address such risks, guided stress tests could be developed jointly by ESMA, ECB, and DSRB, together with national competent and macro-potential authorities, and additional intervention powers for competent authorities to deal with large-scale redemptions should be discussed. As regards the later due-sits directive already provides member states with the option to allow competent authorities to require the suspension of repurchase or redemption of units in the interest of unit holders or of the public. Finally, the creation of leverage via derivative and securities financing transactions and the prosyclical effects of margin and haircut setting practices in these transactions would need to be addressed as well. Floors on haircuts and margins on derivatives and securities financing transactions at the transaction level should change in a time-varying manner. As market participants have a tendency to collectively under-price risk in good times, the current margin and haircut setting practices stimulate the build-up of leverage via these transactions in good times and amplify the leveraging in bad times. These new macro-potential framework could build on the current regulatory frameworks and policy recommendations as applicable to the derivatives and SFTs at the EU and global level. These frameworks include the FSB policy recommendations for haircuts on non-centrally-cleared securities, financing transactions, the BCBS IOSCO margin requirements for non-centrally-clear derivatives and the European market infrastructure regulation. Standardized margin and haircut schedules exist within these frameworks and could form the basis for setting macro-potential margins and haircuts. For example, macro-potential authorities could build on to the standardized FSB, BCBS IOSCO haircut and margin schedules, which offer a transparent means of calculating initial margins as well as explicit numerical haircut values that can be set as floors to haircut and margin calculated with internal models. Let me conclude. Europe needs to further integrate and develop its capital markets and substantially so. In the absence of other cross-country risk sharing mechanisms for the time being, this has a lot of promise for ensuring European households and firms against national business cycle fluctuations. We need to be determined and ambitious in pursuing a capital markets union that will deliver these benefits. This means to provide the conditions under which capital markets can flourish across the Euro area and EU and at the same time to design a regulatory and supervisory framework under which financial stability risks are under control. I am now looking forward to the upcoming discussions in the rest of the conference of the iLevel policy panel that will give us further food for thought, how to create a long-term vision for CMU that strikes the right balance between the two dimensions I have discussed. Thank you for your attention.