Similarly, it makes the (still necessary) process of balance sheet cleansing even harder for those financial intermediaries that have been unable to finish it or have put it off since the last crisis, and still bear the scars in the form of legacy non-performing loans. The increased uncertainty in the macroeconomic and geopolitical environment is also weighing on markets, where valuations still seem elevated in a medium-term perspective. This raises the risk of abrupt and marked downward corrections in financial asset prices, particularly as market liquidity seems more fragile since the last financial crisis. From a more forward-looking perspective, the downward revision to growth forecasts could prolong the current low interest environment which, despite being overall consistent with the macroeconomic situation, still has implications for (more) economic agents’ borrowing and for the (weaker) profitability of financial intermediaries. Added to these clearly identified cyclical risks are a number of new, structural risks – among them those arising from the increasing digitalisation of the financial industry. Digitalisation in finance is being driven by a combination of cutting-edge technological developments (big data, cloud computing, artificial intelligence or blockchain technology), which are transforming the way financial products are designed, developed, distributed and managed. Digital transformation offers the promise of better user experiences, more diversified sources of financing for the economy, lower production costs and greater efficiency in the financial system. But it also raises three types of risk. First, it requires huge investment, the management of complex projects and greater agility on the part of financial institutions.

Over the past quarters, it has made public its concerns about developments in the commercial real estate market (i.e. the market where real estate is an asset class for financial investors), trends in debt levels among highly indebted corporations or, more recently, leveraged finance activities (especiallythe debt incurred by companies participating in LBOs, which is frequently sold off by originators to other financial investors). The HCSF has also formally intervened to curb risk-taking: at the end of 2017 it decided to cap bank exposures to large and highly indebted corporations at 5% of their capital. In addition, to limit the negative consequences for banks of increased risk-taking in the event of a financial shock, the HCSF decided in June 2018 to raise the countercylical capital buffer to 0.25% – in other words, to require banks to set aside more capital to cover their risk exposure toward the French economy. As a countercyclical tool, this buffer is designed to be put in place preventively, when credit constraints are low, i.e. when the economic “cost” of such an additional requirement is limited. It forces banks to build up some room for manoeuvre that can then be used to prevent credit rationing if they incur higher-than-expected losses after a shock or turnaround in the financial cycle. Immediately releasing the buffer would allow banks to tap into this capital reserve and 3/7  BIS central bankers' speeches  support the supply of credit, especially to small and medium-sized enterprises which are the most reliant on bank financing.