those banks that cannot adapt swiftly enough to changing conditions should exit the market. now, when discussing the issue of profitability, it is often held that regulation increases banks ’ costs and reduces their earnings. it is certainly true that regulatory requirements do entail some costs for banks. however, i would take a more balanced view on the costs of regulation. banks tend to overlook the costs of crises, as these are usually borne by taxpayers. taking these costs into account puts the banks ’ criticism in perspective. at the social level regulation still generates a net benefit. 2. 3 good governance having said that, let us turn to the third pillar of a resilient bank. a resilient bank has a sound governance structure and is committed to high ethical standards. investors and customers need confidence that banks are managed prudently. these aspects have gained a lot of attention in the aftermath of recent scandals, such as the manipulation of libor and similar financial benchmarks. these cases of misconduct spoil confidence in a twofold way. firstly, the trustworthiness of banks involved is impaired. and this has negative consequences for the banking sector as a whole. banks will have to work hard in order to heal the wounds. secondly, the reliability, robustness and representativeness of financial benchmarks have been called into question. without doubt, the integrity and credibility of benchmark - setting processes are in urgent need of a general overhaul. we all know : trust is gained only over a long period of time but may be shattered quickly. in a sense, trust is similar to humpty dumpty : it is very fragile and, once it has been shattered, all the king ’ s horses and all the king ’ s men will not be able to put it back together. in that vein, all efforts to strengthen banks ’ resilience can be undone instantly if banks cannot avoid severe cases of misconduct in future. bis central bankers ’ speeches this also applies to banks ’ risk management capacities. on this issue, however, much progress has been made. the requirements for adequate internal control systems and appropriate governance structures have been tightened substantially. let me elaborate on this by referring to reforms of banks ’ compensation schemes. in the run - up to the crisis, asymmetries in compensation in terms of risk and reward led to shorttermism and excessive risk - taking by some employees. inadequate pay and reward systems contributed to large – and in some cases extreme – absolute levels of compensation. that in turn left firms

7 % the previous year. in the 2 / 7 bis - central bankers'speeches euro area, it went up by 5. 4 %. after 8. 4 % the previous year, this is the highest figure recorded since the launch of monetary union 25 years ago. however, these annual averages mask the marked decline in inflation over the course of the year. in germany, it fell from more than 9 % at the start of the year to less than 4 % at the end of the year, and in the euro area, from over 8 % to under 3 %. this was mainly due to lower energy prices. government relief measures and lower market prices for fuels were dampening factors here. food prices grew by double digits on average during the year. but here, too, we can see that price pressures eased significantly over the course of the year. core inflation excluding energy and food continued to rise in 2023, at 5. 1 % in germany and 4. 9 % in the euro area. services prices, in particular, rose more sharply than in the previous year. at first, pent - up demand for services that were unavailable during the pandemic still played a role here. think, for example, of travelling or eating out. this allowed some sectors to expand their profit margins. in addition, wages rose sharply in response to inflation, which also put pressure on prices. comparing today's situation with the situation a year ago, the nature of inflation has changed significantly. back then, inflation was mainly being fuelled by high energy and food prices. on an annual average for 2022, headline inflation was more than twice as high as core inflation. in the meantime, the picture has changed. of late, the core rate was significantly higher than the headline rate. what does this mean? energy and food prices play a key role in headline inflation. these prices typically fluctuate more strongly. by contrast, core inflation is much more stubborn and persistent. it is shaped largely by developments in wages, productivity and firms'profit margins. in january, euro area headline inflation was only around 1 percentage point higher than its pre - pandemic average. meanwhile, at 3. 3 %, core inflation was still 2 percentage points higher than its average rate between 1999 and 2019. when analysing the headline rate, we take a detailed look at core inflation. this is because, as a measure of underlying price pressures, core inflation helps us to assess future inflation developments. it