Clearly, these losses generally produce second-round effects, mainly through reputational damage that tends to affect the financial sector as a whole, rather than individual institutions. As is currently the case, these losses tend to rise, precisely, in the aftermath of crises, where some of the questionable commercial practices are exposed. Banks are hit by these losses at a time when customers, shareholders and public stakeholders are questioning their business model, precisely because of this risk. Consequently, the upshot could be a clear procyclical effect. In a nutshell, we must acknowledge that non-financial risk presents certain features that can exacerbate or compound the effect of a crisis. It is also very hard to estimate and, unlike traditional risks, cannot be eliminated; at best, it may be mitigated. This would be the key question for today: what can we do to mitigate non-financial risk to the maximum extent? In my view, the mitigation of non-financial risk is linked to the quality of internal procedures, IT systems, governance structure or compliance function of a bank. In other words, it is not so much about what banks should do, but how they should do it. Naturally, enhancing governance, compliance or IT systems is not easy. It generally involves additional spending that adds pressure to the already beleaguered profitability of the sector. Understandably, some firms see spending in these areas as an additional cost. I believe it is more appropriate to see improvements in IT or governance as long-term investments.

It therefore benefits households in their capacity as workers, entrepreneurs, investors, borrowers and taxpayers. Similarly, there are several channels through which our policies affect pension systems. Yes, lower rates increase the present value of future liabilities of pension schemes. However, the liability side of pension schemes is only one part of the equation. What happens on the asset side is also important. And our monetary policy has had a beneficial impact on this side of the equation as the value of the investment portfolio has increased. Also, let’s not forget that our monetary policy supports pension systems indirectly by supporting employment growth and thus pension contributions. In any case, it is ultimately up to sound governance structures and longterm strategies to ensure the financial health of pension systems. Equally, monetary policy can have an impact on bank profitability through various channels. Our assessment is that so far these effects tend to largely offset each other in aggregate terms. Low rates might reduce bank profits through the narrowing of net interest margins. Yet, at the same time, by supporting the recovery, accommodative monetary policy reduces delinquencies and defaults, including on mortgages. Improved credit quality coupled with higher lending volumes and an improved market value of assets supports bank profitability. Of course, depending on the strength of their balance sheet, some banks may be more affected than others. Also banks facing structurally high cost-to-income ratios or limited diversification of income sources might have to revamp their business models regardless of the low interest rate environment.