impacting both the financial health of banks and the quality of their assets. the non - bank financial sector has grown considerably in both size and significance ; however, it is not as tightly regulated as the banking sector. last but not least, the overvaluation of real and financial assets could increase the probability of abrupt and widespread corrections in asset prices and thus transform into a systemic risk. having said that, it is important to highlight that a number of monetary policy measures implemented by monetary authorities also contributed to alleviating the impact of the low interest rate environment on the banking sector. examples include the introduction of a two - tier system for remunerating credit institutions'excess reserves, as well as the remuneration on tltros linked to the achievement of lending targets. finally, banks'profitability was underpinned by increased asset values and stronger economic outcomes. as mentioned above, in the counterfactual, the consequences on bank lending and loan servicing would have been severe, with adverse implications for banks'revenues and cost of credit risk. the same applies to the non - bank financial sector. 3 / 7 bis - central bankers'speeches is it already decided that central bank balance sheets must remain large forever? what are the tradeoffs of a large structural bond portfolio? let me first say that these issues are part of the review of the ecb's operational framework and are still under discussion at the governing council. these issues have to be addressed in a holistic way. we plan to publish the outcome of our deliberations in spring. the views i will express today do not necessarily reflect those of the governing council. starting from the balance sheet, we expect that, in the steady state, the eurosystem balance sheet will be significantly smaller than it is today, but still larger compared to its pre - crisis levels. although demand for reserves from banks is volatile and hard to forecast, there are reasons to anticipate that, in the steady state, banks will demand a materially higher level of excess reserves than before the financial crisis, due to the following : first, supervisory regulation, which is likely to translate into increased demand for liquidity. second, banks, in the wake of the global financial crisis, have maintained a precautionary stance. to guard themselves against liquidity and counterparty risks, they show hesitance about lending each other. this places obstacles to the efficient redistribution of reserves not only across, but also within jurisdictions, giving rise

occur when asset prices tumble? monetary policy automatically takes asset price developments into account the first point i need to make is that day - to - day central banks pay attention to asset prices when setting monetary policy, even when, as in new zealand, their formal focus is exclusively on consumption prices. this is primarily because asset price movements impact on cpi inflation and large movements in asset prices can have significant implications for cpi inflation. for starters, in the case of physical assets, if their prices are rising faster than general inflation, people try to build or create more. for example, if the price of paintings is going up artists get painting. to do that they have to buy more paints, brushes and canvas, putting pressure on prices of these materials. in addition to that direct impact, asset price movements - physical and financial - also feed into cpi inflation due to the so - called “ wealth effect ”. as asset prices rise, people tend to feel wealthier. some people go shopping as a result, and in an economy already running at full steam this gives inflation a push. this can apply with any kind of asset, but in new zealand we see this mostly through house prices, due to the high proportion of home ownership here, as well as the large proportion of household wealth associated with housing, as illustrated in graph 1. graph 1 household wealth : housing and net financial assets asset prices also feed through into spending and hence inflation in other ways. for example, asset price increases improve balance sheets, increasing the borrowing power of firms and individuals. increases in net worth tend to increase the willingness of lenders to lend and borrowers to borrow, facilitating a general expansion in spending as well as an expansion in spending on the construction of appreciating assets. in new zealand, for example, house price inflation can lead to greater demand for houses, and price increases in construction - related goods and services. these goods and services are directly included in the cpi making up about 8½ per cent. lately, “ purchase and construction of new dwellings ” has been notching up price increases approaching 7 per cent year - on - year. this is much higher than the cpi average of around 1½ per cent ( see graph 2 ), and contributed materially to our recent nontradables inflation of around 4½ per cent. graph 2 the link between house price inflation and the cpi ( annual percentage change ) central banks also pay attention to asset prices because they contain information that ’ s very useful when setting monetary policy