crisis economic growth in countries with bank - based systems lags behind that of countries with more balanced financial systems. 3 the clear policy message is that it is better to finance the real economy through several channels rather than to rely on just one. capital markets in particular can act as a useful “ spare tyre ”. 4 that is why the esrb fully supports the capital markets union, which aims to remove barriers to the development of capital markets. removing these barriers will foster changes in the structure of the financial system in europe. in fact, capital markets and other non - bank sources of external finance have been growing relative to banks. 5 this growth should improve firms ’ access to funding, and ensure that any losses are dispersed more widely. low bank profitability the overbanking in europe, highlighted in the asc ’ s report, is also a factor in the currently low 1 / 4 bis central banker's speeches level of bank profitability. a number of reasons have been mooted as the causes of this low profitability, including low interest rates. long - term real interest rates have been falling in the major advanced economies for two decades. technological change, demographics, income inequality and safe asset scarcity are just a few of the factors exerting downward pressure on long - term real rates. 6 accommodative monetary policy by the european central bank and other major central banks, acting in accordance with their price stability mandates, has also contributed to low interest rates. low interest rates tend to squeeze net interest margins owing to downward rigidity in banks ’ deposit rates. 7 but overbanking is also a factor in the current low level of bank profitability. overcapacity in some national banking sectors, and the ensuing intensity of competition, exacerbates this squeeze on margins. such over - capacity also means the sector does not operate at the efficient frontier, which is one reason why cost - to - income ratios remain high in some countries. at the same time, banks benefit from revaluations in their fixed income portfolios. moreover, profitability is boosted by a greater flow of lending and lower loan loss provisions than would have occurred in the absence of accommodative monetary policy. analysis by the ecb suggests that these effects tend to outweigh the impact on net interest income over the short term, but the picture varies depending on banks ’ business models. 8 in the broader context of generalised overcapacity and technological innovation, some banks

michael s barr : managing the promise and risk of financial innovation speech by mr michael s barr, vice chair for supervision of the board of governors of the federal reserve system, at the dc fintech week, washington dc, 12 october 2022. * * * thank you, chris, and thank you for the invitation to speak to you today about the opportunities and risks of innovation. for the purposes of our discussion today, i will be focusing on financial innovation supported by new technologies, or fintech. 1 in the fall of 2017, we managed to get chris to accept an invitation to speak at a fintech conference in ann arbor, so it's about time that i returned the favor. since then, we have continued to see major changes in technologies and the financial services and products they support. in looking over the materials for that conference, however, i'm struck by how the key themes have remained constant over, not only the last five years, but arguably for centuries. financial innovation has always brought promise and risk, and the urgent need to get regulation right. in 1610, when dutch merchants and bankers were otherwise busy creating global finance, a series of destabilizing bank runs also moved them to establish a ban on short - selling. many of the issues we grapple with today are not as new as we think. supporting innovation with appropriate regulation first, let's start with the promise. every day, we all have countless interactions with the financial system - depositing our paychecks, buying groceries, paying rent, borrowing, saving, and insuring against important risks. the promise of fintech is that it can make financial products and services better, faster, cheaper, and more available. financial innovation supported by new technologies can disrupt traditional providers by spurring competition, creating products that better meet customer needs, and extending the reach of financial services and products to those typically underserved. to realize the benefits of innovation, we need to manage relevant risks. we have seen through history that excitement over innovative financial products can lead to a pace of adoption that overwhelms our ability to assess and manage underlying vulnerabilities. as we saw in the lead up to the global financial crisis, innovative financial products can mask emerging risks, resulting in significant harms to businesses and households and ultimately undermining financial stability. these products can leave consumers vulnerable if they are not coupled with meaningful disclosures and basic protections against abusive practices. innovation can lead to disruptions of existing