Mention should also be made of the new risks arising from the transition to a more sustainable economy. It is crucial that the sector should incorporate into its decisionmaking process climate change-associated risks, physical and transition-related alike. And we supervisors must ensure that banks correctly price the risks associated with climate change and incorporate them into their portfolio management. Many supervisors (including the Banco de España) are developing environmental stress tests to be introduced in the coming years. Their aim is to simulate the consequences for financial institutions of different hypothetical scenarios entailing changes in the structure of the economy. I would also like to reflect on what I consider to be one of the main challenges for the banking sector in the short, medium and long term, namely the low profitability of the banking business. It was already low in many European countries before the coronavirus crisis, but the present crisis will put it under further pressure. To address this challenge, it is essential for banks to continue to make efficiency gains, by cutting costs and making more use of new technologies. Consolidation in the sector could be an appropriate way to achieve this aim. Specifically, there appears to be room for consolidation both in Spain and in other European jurisdictions where the indicators point to some surplus capacity. Naturally, such processes are the responsibility of banks’ owners, while our role, as banking supervisors, is to analyse any merger plans submitted to us from the standpoint of business viability.

Amid these increased uncertainties, there has been heightened volatility in the international financial markets, arising in part from increased sovereign credit risks and, more recently, the sharp movements in the major currencies in the foreign exchange markets. In contrast, the recovery in the emerging market economies, in particular Asia, remains robust, with the potential for relatively strong growth to be sustained. While most Governments in Asia had an important role in stimulating the economic recovery, private sector activity has been revived and is now having a greater role in driving the economy. Also, with rising intra-regional trade, external demand from the region is providing additional support to growth. Amid this favourable growth prospects, the region however is also confronted by a number of challenges. As highly open economies, the weaker global environment will, and indeed, has already resulted in a moderation in external demand. In addition, the divergence in growth prospects between the advanced and emerging economies, has precipitated surges of capital inflows, in particular, to Asia. This could in turn lead to the risk in the build-up of destabilising imbalances in our economies. Asia today, is however, in a better position to address these rising concerns. First, domestic demand has steadily increased in importance since the beginning of this decade and is contributing towards a more balanced growth. Second, is the diversification of Asia’s export markets towards increased intra-regional trade which now accounts for more than 50% of the total trade in Asia.