18. 09. 2019 monetary policy and bank profitability in an environment of uncertainty 10th conference on the spanish banking sector, organised by the ivie and the university of valencia pablo hernandez de cos governor ladies and gentlemen, good morning. i should like to thank the valencian economic research institute for the invitation to speak at this conference on the spanish banking sector, which this year marks its tenth anniversary. i am honoured and delighted to participate in this event and share some reflections with you regarding the current profitability of spanish banks and the main challenges that will shape their future. as you know, this is a subject that is attracting a lot of attention in europe, both on the part of analysts and supervisors and the industry itself, owing to the concern about banks ’ low profitability. before i address this issue, allow me to start by describing the economic situation in the euro area and, in particular, the decisions taken by the governing council of the european central bank ( ecb ) last week. this is very relevant for the financial system, insofar as it is the context in which its activity will be carried out over the next few years. 1. the economic situation in the euro area and the monetary policy response the international economic context has undoubtedly become more unfavourable over the past year, with a slowdown in growth and, in particular, in trade. the latest information shows that global activity slowed across the board in the second quarter and the highest frequency indicators point to persistence of this weakness over the coming months. meanwhile, the decline in world trade appears to have steepened, against a background of heightened uncertainty regarding the trade policies of the united states and china and intensification of geopolitical risks. although the decline in activity has been particularly strong in manufacturing, the slowdown in recent months in the global services output pmi, which remains in expansionary territory, is indicative of an increase in the risk of a greater slowdown in global activity. given its degree of openness and the existence of certain idiosyncratic factors, the euro area economy has been one of the most affected by these international trade developments. specifically, there was a significant slowdown in the euro area from the beginning of 2018, mainly due to the sharp moderation in its exports. as a result, in 2018, gdp grew at an average rate of 1. 8 %, 0. 7 percentage points less than in 2017, while year - on - year growth fell to around 1 % in

management. it is well known that the ecological transition process entails two types of risk : ( i ) physical risks, caused by the direct effects of climate change, storms, floods and natural disasters, and ( ii ) transition risks, which refer to the potential effect on specific borrowers of technological changes, changes in customer behaviour and preferences and the regulatory measures taken precisely to prevent physical risks from materialising. the measurement of these risks poses significant challenges. for example, the long time horizon over which the effects of physical risk are observed far exceeds that used to measure conventional banking risks. there is also a lack of information allowing an assessment of the firms that could be most adversely affected by the transition and it is not easy to determine the exact consequences of the different future scenarios. nevertheless, i believe that the banking sector should, to a large extent, already be considering transition risk. we should not forget that analysing the business environment is an essential part of the risk assessment and management that banks must carry out and that, unlike other ‘ transitions ’ prompted by sudden changes in technology or behaviour, the transition to a decarbonised economy has been announced and reported on. in order to foster robust management, a series of expectations from both the single supervisory mechanism and the banco de espana, within the remit of their supervisory competences, on the appropriate measurement and management of these risks within the sector is expected to be published soon. allow me to briefly refer to our work as macroprudential supervisor. i am sure you will agree that, in order to be able to conduct this type of supervision, we need to assess financial institutions ’ exposures to high - carbon emitting activities, perform stress tests for the financial system as a whole and define the scenarios and methodologies that serve as a guide for banks. in this regard, in order to analyse the risks associated with climate change and environmental degradation, we are developing an internal methodology on the basis of the stress tests applied to the spanish banking system every year. this tool has been selected owing to its forward - looking nature and its ability to incorporate alternative scenarios. in an initial stage, the aim is to assess the risks entailed by the environmental transition, leaving physical risks for a second phase. specifically, we need a tool that can analyse the different policies or events for which there is no past experience and whose impact extends over a lengthy timeframe ( around five years ). examples of the type of scenarios would be policies that