. as house prices and debt levels trend increasingly upwards, so too housing becomes less affordable, particularly for first home buyers. while macro - prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term. such measures should also reduce the risk of a sharp housing downturn and the loss of equity that would result, particularly for highly indebted home owners. new macro - prudential framework the aim of macro - prudential policy is to manage risk in the financial system arising from transient but pervasive macro - financial developments, such as credit and asset price cycles or major international financial shocks. while micro - prudential policy settings ( e. g. capital ratios and risk weights ) are fixed on a through - the - cycle basis, macro - prudential policy measures are introduced as an overlay when needed in order to mitigate significant but transitory risks affecting the whole financial system. macro - prudential policies can achieve this in two ways : first, by increasing the resilience of bank balance sheets to a potential shock ( which also gives them a greater capacity to keep lending in the downturn ) ; and second by seeking to dampen a credit and asset price cycle on the upswing in order to reduce the severity of the eventual downturn. macro - prudential policies have become more prevalent since the gfc because that experience highlighted the massive financial and economic damage that can result from macro - financial shocks. bis central bankers ’ speeches a macro - prudential framework for new zealand has been developed over the past year or so. the reserve bank has communicated the framework through a range of speeches, consultation documents and reports ( see for example spencer ( 2012 ), rbnz ( 2013a ), rbnz ( 2013b ) ). a memorandum of understanding has been signed between the reserve bank and the minister of finance which sets out the key objectives, instruments and responsibilities under the new framework. the reserve bank has decision - making responsibility for macroprudential policy implementation but must consult with the minister and treasury prior to the deployment of any instrument. the reserve bank has also undertaken to keep the public informed on macro - prudential policy through speeches and publications, with the main accountability document being our six monthly financial stability report. four potential instruments have been put forward and these are summarised in table 1. the four instruments work in quite different ways to reduce financial system risk. the

cyprus amongst the most liquid banking sectors in the union, where the average lcr amounts to 175 %. at the european level, including cyprus of course, the banking sector faces a number of challenges. the profitability prospects of banking both in cyprus as well as across the eu remain challenging. but why is profitability an area of interest for regulators? a sustainably profitable banking sector is necessary to build buffers to absorb unexpected losses, like the ones we have seen recently due to the pandemic. it also enhances further the ability to provide viable lending to businesses and households alike, contributing to the efficient functioning of the real economy. 1 / 5 bis - central bankers'speeches under this light, banks'profitability is high on the agenda from a regulatory perspective. the level of return on equity of european banks is shy on their cost of capital and below the respective level of other jurisdictions, like banks in the united states. a low return on equity compared to the cost of capital is a european structural issue and raises the need for formulating appropriate action plans, both by regulators and banks alike. if we want these actions to have an impact, we must first understand the factors that drive this weak performance. overcapacity of the banking sector is a dominant factor. according to most indicators there are too many banks in europe relative to the size of the market. this implies that there is significant scope to benefit from consolidation without exacerbating the problem of " too big to fail " through the creation of mega banks. moreover, the banking union which has ended a prolonged supervisory divergence enhances the capability of reaping these benefits in a more efficient manner. credit risk is inherent in banking and is considered a major challenge for the european banking sector. for countries that have a high level of legacy non - performing loans like cyprus, this risk requires particular attention, despite the tangible improvement achieved in the last years. a weaker than expected economic environment may result in deterioration of asset quality. it is therefore important for our banks to continue the enhancement of the quality of the asset side of their balance sheets, bridging the gap with our european peers. european banks are also facing emerging risks beyond the traditional business model risks i just mentioned. i will focus on the three i consider as the most prominent ones. the first one is the exposure to climate - related and environmental risks, which will be one of the main concerns for both supervisors and banks in the years to come. the transition to