these recent events. what has been evident so far, however, is that this crisis has been more financial than macroeconomic in character and effect. let me illustrate. in the us, despite all the concern with the subprime woes, the real gdp growth in 2007 looks to be 2. 6 %, the same as in 2006. in asia ( ex india and china ), the region is expected to grow at 5. 9 % in 2007 compared to 5. 7 % in 2006. and in the philippines, as you know, we are expecting 2007 full year gdp growth to be around 7 percent, our highest rate in three decades. the financial impact of the crisis, on the other hand, has been increased volatilities in all the equity markets and spread widening across credit markets. nonetheless, more market analysts now believe that the risks are tilted to an outcome in 2008, particularly in the us, wherein the financial market volatilities would begin to more noticeably filter through to the non - financial portion and non - housing portion of the economy. as the real sector becomes affected, this is an event that could prove to be critical to the asian growth story. the region has become less dependent on the us, but it is still not immune to a us slowdown. clearly, intra - asian trade has grown, but most of the growth in intra - asian trade has been an increase in trade with china and india, a portion of whose imports from the region are also re - exported to the us. the success of the us, and the other major economies, in avoiding a prolonged economic slowdown therefore becomes of particular importance to asia. the concern goes beyond merely whether the major economies succeed in containing the slowdown, but also the speed and manner in which this is accomplished – whether this is done through market prices or through structural reforms. which instruments are chosen could, in turn, impact whether there would be an orderly adjustment in capital flows and exchange rate movements as well as the behavior of asset and equity prices. as you must be aware, the region, including the philippines, has been grappling with the impact on exchange and interest rates of the tipping of liquidity into our region. in the philippines, the bsp had to put in place our own policy package ( that includes the build up of reserves, prepayment of external debt and the liberalization of the foreign exchange system ) to contain the impact on the peso of the strong foreign exchange inflow

seeing diminishing margins in deposit business, and that ’ s partly because institutions are loath to pass on negative rates to their retail customer base. it is also apparent that the contribution from lending business has remained largely steady. another factor we should not overlook here, of course, is the tougher competitive environment – though i might add that rivalry has always been very intense in germany ’ s banking sector. fintechs have been disrupting the market, and incumbent credit institutions have lost pace with developments on many fronts. some segments of the value added chain have migrated to fintechs, eroding banks ’ revenue streams in those areas. and as for tapping fresh sources of earnings such as alternative payment procedures, traditional credit institutions are already lagging behind the “ new kids on the block ". 1 / 4 bis central bankers'speeches the debate surrounding the low levels of profitability in germany ’ s banking industry inevitably returns to the role played by regulation. in the pre - crisis era, there were undoubtedly a number of regulatory blind spots which many institutions capitalised on to engage in excessively risky transactions. this behaviour has taken its toll on the entire economy. that is why it is good that improved rules are now in place and supervision has been tightened. needless to say, i am not expecting a rapturous reception from credit institutions, but the reforms were right, they were important, and to a large extent, implementing them represents a one - off expense. regulation, digitalisation, low rates, overcapacities – all these factors suggest that profitability is going to remain under pressure for the foreseeable future. the economy may be on an upbeat path right now, but if the environment takes a turn for the worse, it will only add to the pressure on credit institutions. what i am saying is that from today ’ s perspective, it doesn ’ t look like the cake is going to increase in size again over the short and medium term – in fact, it will probably even shrink a little further. how can the sector respond to this state of affairs? probably through a combination of consolidation on the one hand and reorientation on the other. 3 consolidation and the ever - shrinking cake let ’ s begin with consolidation. the gradual downsizing of branch networks and institutions is a clear signal that consolidation is already under way. but there is still some way to go yet. it would appear logical to press ahead with consolidation, particularly with a view to boosting the cost