04. 10. 2016 finalising basel iii vii expansion - kpmg financial meeting : “ transformation of the banking business model ” luis m. linde governor allow me to begin by expressing my gratitude for the invitation to inaugurate this vii edition of the expansion - kpmg financial meeting. last year we met, around these same dates, to analyse the move from “ restructuring ” to “ transformation ” of the banking sector. today, the focus of the discussion is on “ transformation ” ; and this is positive, as it shows that banks are already immersed in a process of change, enabling them to face the new landscape in the wake of the crisis. the conference programme identifies three areas that are key to the complex setting in which banks are now pursuing their activity. first, the search for profitability, which in a context of very low interest rates is a fundamental challenge for european and spanish banks alike. second, how to address the challenges and opportunities arising from growing technological innovation, a question to which the banking sector cannot remain immune. third, adaptation to the regulatory changes that have come about as a response to the weaknesses identified in the wake of the international crisis that began in 2008. regarding this latter area, i shall devote my address to the changes in the global solvency framework, not only because of their significance but also because of the timeliness of the matter. the governors and heads of supervision comprising the body overseeing the basel committee on banking supervision met on 11 september. at that meeting we reiterated our aim to conclude by the end of this year the reforms outstanding and thereby finalise the new capital framework known as basel iii. basel iii : lessons from the crisis and regulatory response the fundamental aim of the basel framework is to offer, at the global level, minimum regulatory capital rules that ensure the solvency of internationally active banks. this is essential to preserve financial stability and to provide security to investors and depositors as to banks ’ capacity to withstand risks, such as those arising, for example, from adverse economic scenarios, from inappropriate management decisions or, in general, from unexpected circumstances. the international financial crisis in 2008 highlighted the fact that these objectives have not been met, or not to the extent necessary. although there were various causes behind the crisis, in the banking sector a series of grave weaknesses came to light. these included most notably excessive leveraging and credit growth ; banks ’ high exposure to systemic risks ; and the absence of sufficient tools to properly address liquidity and funding problems

fuel the negative effects on the capacity for recovery and medium - term economic growth. in this context, fiscal policy may be particularly effective in preventing these potential vicious circles by supporting non - financial corporations. this support would alleviate problems of over - indebtedness for firms considered to be viable, thus helping them to survive. it would also enable investment and employment to be more expansionary during the recovery. moreover, this support would avoid a potentially significant deterioration in the banking sector ’ s financial position, which would otherwise add a further financial element to this crisis, possibly making it much more persistent, as we saw in the previous global financial crisis. thus, by lending to households and firms, the banking sector could, help reactivate the economy when the pandemic is over. this will surely require a smoothly functioning credit channel, of such importance in european economies. the european central bank ’ s strategy review in this third part of my address i will take a longer - term perspective and reflect on the changes that are occurring in the conduct of monetary policy in the advanced economies, which have prompted the ecb, like other central banks, to review its strategy. in the years leading up to the 2007 - 2012 crisis, which in our case coincided with the initial years of the ecb ’ s existence, a broad consensus took hold in the advanced economies regarding the role and functioning of central banks. specifically, according to this view, the monetary authorities should act as independent entities, not directly controlled by governments, with a clear mandate to promote price stability and, in some jurisdictions, such as the united states, full employment. the price stability mandate is normally expressed as a numerical inflation target, frequently 2 % or, as in the case of the ecb, a rate below, but close to, 2 %. to achieve its price stability target, the central bank adjusts the general level of interest rates on the funding raised – via bank loans or in the debt markets – by agents in the real economy ( businesses, households and governments ). although the central bank controls the nominal interest rate, it is the “ real ” interest rate – that is, the nominal rate less expected inflation – that is relevant for households ’ and businesses ’ spending decisions. for instance, a nominal interest rate of 2 % when expected inflation is 4 % is much more expansionary than a nominal interest rate of 1 % in a noninflationary setting. given that the prices that determine inflation are partly rigid, the central bank