Indeed, for European banks affected by big operational events, this deterioration has stood at over 1.25 pp of CET1 in the past five years, with a rise to 2.1 pp in 2018. In Spain’s case, the potential materialisation of costs associated with legal risks continues to contribute to deposit institutions’ operational risk. The processes linked to past litigation such as that of the floor clauses have had an estimated cost for the sector  7/10  of over € billion to June 2019. Moreover, there are other significant legal processes still pending resolution. In any event, legal risk and certain other factors relating to banks’ conduct have had a considerable impact on the reputation of the banking sector, and not only in Spain. It is worth recalling here that reputation and customer confidence are fundamental to the banking business. Therefore, institutions should strive to reverse this tendency by providing their customers with financial products and services suited to their needs and capabilities, and they should likewise supply the relevant information clearly and transparently. Lastly, in relation to the systematic assessment of the balance of risks to financial stability that we regularly make at the Banco de España, we are including other elements, whose materialisation could occur over a longer horizon. I refer here to the potential changes technological innovation may entail for the market structure of the financial sector, and those arising from climate change. The importance banks give to these changes will have to increase accordingly.

In addition to this baseline projections scenario, a series of risks persist in the geopolitical and economic policy areas. Should these risks materialise, they might bear down even further on future growth. At the global level the US-China trade conflict, prompting increases in the maximum tariffs applicable to specific products, continues to be the main source of uncertainty. These disputes, which feed through to all countries through global value chains and which especially affect Europe owing to its high degree of openness, are exerting a significant adverse impact on trade and putting back investment projects. Regionally, the risk of a no-deal Brexit has increased and Germany is on the verge of an economic recession. In Spain, uncertainty persists over the future course of economic policies, a situation which should be resolved following the general elections in November. Flatter economic activity and the potential materialisation of geopolitical risks may have implications for financial stability through various channels. Firstly, this may lead financial market players to reassess their perception of risk. That would mean that the currently very compressed risk premia on financial instruments would increase, thereby reducing asset prices and, therefore, wealth and collateral values. These developments might affect to a greater extent the more vulnerable segments, such as that of debt with lower credit quality, including leveraged loans and CLOs, and markets with high valuations. And they might extend to other assets. 3/10  Secondly, agents’ income flows may be affected, with implications for their consumer spending and investment decisions.