 So it's a great pleasure to be here. Thanks a lot for coming and looking forward to the discussion. But before I would like to sketch the German Council's proposal on how to enhance stability in your area. So some years ago we've developed a proposal that was called Mastery 2.0 when I was going to talk about that in a couple of minutes. As you know, Europe at the moment is in a very fragile situation. So we have plans coming from many sides. We have the slowdown of the world economy. Monetary policy becomes increasingly ineffective with the danger of Brexit. And we also have a shift of political parties. So we are moving more towards parties with opposing reforms and consolidation. There is a political polarization in many countries. And of course we have the refugee crisis which is one of the big challenges. So we have to ask how should we move forward in Europe? Do we need more integration or do we need a strengthening of the existing framework? And so we believe that any proposal that you can have should respect the principle of the unity of liability and control. So those who take the decisions should also take the responsibility of the costs. And if you agree to that then there are basically only two fundamental options. So either you transfer fiscal and economic sovereignty to the European level and then I was willing to assume joint liability. And this of course would mean that there would be a central decision making of authority at the European level which would be able to enforce tax increases, spending cuts and also structural reforms. Or alternatively you leave economic and fiscal sovereignty at the national level but then you cannot have joint liability for government debt. So this is the no bailout clause as everybody did in the last week's treaty. And so we've been discussing this issue a lot and we came to the conclusion that currently it's very unlikely that there's going to be a transfer of fiscal and economic sovereignty to the European level because many European countries are actually unwilling to give up their budgetary autonomy. And if that is the case then we'll start with the second option. And that then means that we have to make sure that the no bailout clause is actually credible. And there are two ways to achieve that. You can achieve it ex ante by having fiscal rules such as disability growth pact which implies that the euro area countries never get in a situation where they would have to be bailed out. Or if it happens you would need to allow for a sovereign default. Exposed. The reality of course looks a bit different so we know that fiscal rules were not enforced and are still not being enforced. In the crisis sovereign default was largely avoided and of course the reason was that there was to be a contagion. And the sovereign exposures are still considered as risk-free in regulation which of course is slightly inconsistent with the idea of the no bailout clause. So if we look at the evolution of the spreads of government bonds so we can see that with the introduction of the euro the spreads actually converged more or less to zero which meant that any euro area country could borrow at more or less the same rate. Which given that fundamentals were still quite different already seems to suggest that at that time the no bailout clause was not very credible. And the fear is that if you have such a situation that there is no market discipline which means that there are reduced incentives for consolidation and structural reform. Then of course we had the euro area crisis which can be seen as something like a wake up call so investors suddenly discovered that not all euro area countries are the same. And then we even got into this kind of self-fulfilling dynamics and I think it's fair to say that we can be happy that the ECB at that point was able to calm down the situation by announcing OMT. Of course we have a lot of legacies from the crisis. So we've seen this large increase in public debt which was partly due to the bank rescues and Ireland of course is a very good example of a country that had relatively low debt levels before the crisis and now is relatively high debt levels. In addition what we see is that consolidation has actually come to a halt in the euro area in the recent years and we also see that there is an increasing interlinkage between sovereigns and banks in quite a few countries banks took the cheap liquidity from the European central banks and invested the money in domestic sovereign bonds which means that one of the goals of all these reforms was to mitigate the links between sovereigns and banks. Here there is an instance where this actually was not achieved because banks are now holding many more sovereign bonds in the balance sheet than they did before the crisis. So the German Council's proposal that was developed a couple of years ago has three pillars. So the first is fiscal policy, the second is the crisis mechanism and the third is the financial framework or the regulatory framework and as you can see the fiscal policy is still a national responsibility whereas the financial framework is a European responsibility and many of these things actually have been implemented similar to what we've visited. So one important component of the fiscal policy pillar is the low bailout or the strength market discipline and then of course there are all these fiscal rules the stability growth pact, the fiscal compact combined with the national debt breaks. As to the crisis mechanism, we of course now have the ESM, European Stability Mechanism and in the financial framework we now have the European Banking Union and I think it's important to say that all these are very important steps forward in order to stabilize the euro area. However, there are two components in our view which are still missing. One refers to the crisis mechanism, the second refers to financial regulation. Regarding the crisis mechanism, we still lack an insurance mechanism for sovereigns and I'm going to talk a bit about that and regarding banking regulation one of the big shortcomings is as I mentioned already that sovereign exporters are still privileged in financial regulation. So let me talk about the two things in terms. So what is the goal of a sovereign insolvency regime? The goal is to allow for an orderly restructuring of sovereign debt with loss sharing by private creditors but at the same time without destabilizing the entire euro area. So that's the clear idea. So it's very similar in a sense to the bail-in mechanism that we also have for banks. So the idea is that you would like to reestablish market discipline but you would like to avoid things that happen in Greece where you basically had to do all this in an ad hoc fashion which certainly was not very optional and introduced a lot of uncertainty. Importantly, the restructuring of debt should always be combined with the macroeconomic restructuring program. So the idea would be that if a country asks for an ESM program there should also be immediately an analysis of the debt sustainability and depending on the outcome of that analysis there would be an automatic lengthening of maturities and if debt proves not to be sustainable potentially a nominal debt reduction. However, a debt restructuring of course is difficult if banks are holding a lot of sovereign debt on their balance sheets because then there's a problem that the debt restructuring would immediately also threaten the solvency of the banking sector and therefore maybe then the restructuring would again never happen and therefore we believe that if we represent for the implementation of a sovereign and solvency regime it's actually that we've also removed the privileges for sovereign exposures in banking regulation. So the goal would be to mitigate the snacks between the sovereigns and the banks and in particular it would mean that you would want to reduce the concentration risks in the banks' balance sheet you would want to raise banks' absorption capacity and you would want to reduce price distortions. As you know there are a couple of privileges in current regulation so the large exposure limits don't apply to the sovereign exposures there are no capital requirements according to risk and there's also a privileged treatment in the new liquidity regulation. So if you look at the concentration risk in bank balance sheet and this is data of the last EBA stress test so Ireland is the second right that's very small so actually Ireland doesn't have a currency where the huge problem there Belgium has an exposure of more than 300% of the bank's equity to sovereign counterparties. And what you can also see is that there's a strong homebites and also these investments in sovereign bonds is a domestic sovereign bond this is especially true for the southern periphery countries in Germany. If you look at the right hand side this shows you what this actually implies in terms of risk and of course it makes a difference whether you have a high concentration in German government bonds or let's say in Portuguese government bonds that makes of course a difference and the risks coming from that could be very different. So our proposal regarding the removal of privileges of sovereign expositors has two components. The first is a risk adjusted large exposure limit where the limit would depend on the country's creditworthiness and the second is risk rated capital requirements where we would rely on the basic risk rates for sovereigns and this table here shows you the numbers so the first column is actually the base of risk rates for sovereigns so these risk rates exist they're not just not being applied at the moment. You can see if you compare them with the third column you can see these risk rates are much lower than for corporations and you also see that for quite a few countries in the euro area actually the base of risk rate would still be zero and in Ireland it would be 20% so these would be the risk rates and the next column shows the large exposure limit so this would mean that any bank in the euro area could hold only 25% of their equity in Greek bonds but they would be allowed to hold 100% of their equity in addition to everything else they're holding in let's say German government bonds there would be a higher limit for sovereign bonds from a country with a higher rate. What would this imply? Of course it would be large portfolio allocations and this would especially apply to Germany, Spain and Italy of course because these are very big countries all this would amount to 578 billion euros but this is the data from the stress test so this only includes the significant banks we should keep that in mind does not include the non-significant banks because we don't have any data for them regarding the additional capital requirements the number is actually pretty small so the additional capital requirements amount to only 35 billion euros which is 3% of own funds we see there's a lot of heterogeneity across countries so this would mostly affect Italy and Spain in relative terms so compared to old funds also Portugal but still the number is relatively small and this also means that the additional loss absorption capacity that you get by having this report is relatively small so the really important measure is the large exposure limit this matters a lot the capital requirements are of secondary importance it's important when you implement something like this that you need provisions against prosyclicality we know that many regulations that we had before the crisis proved to be strongly prosyclical and the proposal that we have here is that one should use average values for the calculation of the large exposure limits and the old funds in order to reduce this prosyclicality and also of course you would need a long transition phase in order to smoothen the transition to the new regime let me say a few words about common deposit insurance so in the beautiful German council there are two important arguments why now may not be the time to introduce common deposit insurance so first of all there are still these very close links between the sovereigns and the banks which means that national policies may actually shift risks from the national to the European level and second we have this high legacy debt in the banking sector and especially this large amount of non-performing loans so in a sense before we can actually think about introducing common deposit insurance we need to take additional measures and two of them would be that we should remove the privileges for the sovereign exporters and the second is that we would have to solve the legacy debt problem in the banking sector so let me say a few words also about the low interest rate environment which of course is one of the topics of the week given that we're going to hear some news on Thursday about what's going on in monetary policy so this graph shows you the euro area yield curves and what we see is that what happened over the past years the first manner that were taken they mostly reduced the short run yield but the more recent measures also reduced the long term yield which means that now the margin between long term rates and short term rates has been compressed quite substantially and that of course puts pressure on base earnings who are earning money from doing maturity transformation and it seems that German banks are going to be hit quite substantially by this over the coming years so at the moment we don't see so much yet because the German bank could be grant loans at fixed rates so it takes some time until you really see it in the balance sheet but there's a recent study by the German supervisor in Deutsche Bundesbank who shows that the profits of the smaller German banks are going to fall by between 25 and 75% in the upcoming 5 years which is quite substantial in addition, German life insurance will be hit very hard by the low interest rate environment you probably know that in Germany it's very common to have these long term guarantee products and at the moment the average guarantee rates on the France and Belgium are around 3% and you may imagine that it's not easy to earn that in the market and so there will be substantial problems also in the German life insurance sector so there's a fear that the drop in profit margins is going to set incentives for excessive risk or search for money and in a sense this is exactly what is intended by monetary policy the problem of course is that even if you take higher risk at the moment the return that you get is relatively small so let's say you do a lot of maturity transformation with relatively flat yield curve then you take high interest rate risk but the return you get is actually very small and the same if you go into high yield bonds or whatever a second issue is that there may be a surprise bounce so over the past years we've seen sharp increases in stock prices in many countries there's also been a correction recently but what we've shown in our recent report is that this increase in stock prices over the past years can largely be explained by the low interest rates so in that sense by a fundamental factor but at the same time what we see is and especially when interest rates are very low the sensitivity of stock prices to changes in interest rates is very very high and of course monetary policy itself introduces high volatility so there's a picture of the 3rd of December 2015 so this is what happens when at the December meeting of the Government Council of the ECB there could also be asset price bubbles in housing of course which is an issue also in Ireland we see that the evolution of house price has been very heterogeneous across the euro area that we certainly see price pressure in certain regions and in certain segments and at the same time the credit expansion remains moderate where you could say that maybe the problem is not as severe we know very little about commercial real estate the data that we have is on residential real estate and the ECB for example argues that pressures are building up in the commercial real estate market but it's still unclear how severe the pledge really is so if you ask me are we is there a threat of a new financial crisis and I would say that if we have this long phase of low interest rates it certainly threatens the business models of banks, insurance companies and so on and there certainly at some point will be the market asset of some institutions but maybe the scenario of a financial crisis would rather be one where the interest rates go up again so imagine, I mean nobody can imagine that at the moment but in a couple of years maybe the interest rates are going to go up again maybe they go up faster than expected and then many financial institutions actually will be in deep trouble and remember that historically most banking crisis took place in an environment rising interest rates and not of low interest rates and so I think that this would actually be the most threatening scenario having a sharp interest rate increase after a long period of low rates so one of the challenges for regulation what we as soon as need is the more comprehensive capital integration of the interest rate risk in pillar one of the Basel Accord we need the limitation of lending by credit or credit of specific macro financial instruments and of course I have described advance in that respect in Germany such instruments at the moment don't even exist there is always danger of business being shifted to the less regulated sector to the shadow banking sector and I personally skeptical that we will ever be able to fully regulate this and therefore I do not think that financial stability in the end can be guaranteed by macro potential supervision alone and at the moment the ECB argues that financial stability should not be tackled by monetary policy but only by macro potential supervision however we also see that this can lead to inconsistency if at the one hand the monetary policy tries to increase risk taking if the economy on the other hand then macro potential policy is supposed to contain that risk take and therefore I think that the ECB cannot ignore the consequences of its behavior on financial stability and if it were taking these risks for financial stability into account I think it would be clear that monetary policy should not be loosened any further so if you come to the conclusion as I said at the beginning Europe is in a very fragile situation and this makes it all the more important to strengthen the architecture of the euro area I believe at the moment it's unwise to push for further integration that would be very difficult but rather we should try to strengthen the existing structures in order to prevent a break up in the next crisis and I think a lot has been done and we should continue on the path that we've taken after the crisis which would mean that we should continue fiscal consolidation and improve the enforcement of fiscal rules we should further improve the crisis mechanism especially by introducing an insolvency mechanism for sovereigns we should further strengthen the banking union especially by removing the privileges for sovereign exposures but of course all this will be difficult if we don't return to economic growth but the return of economic growth will largely depend on the implementation of structural reforms which would be able to increase investor and consumer confidence and we should ask too much from monetary policy in that respect so thank you very much for your attention