carlos da silva costa : banking conduct supervision - new challenges 10 years after the financial crisis opening address by mr carlos da silva costa, governor of the bank of portugal, at the conference on " banking conduct supervision : new challenges 10 years after the financial crisis ", hosted by the bank of portugal, lisbon, 25 september 2018. * * * as prepared for delivery. good morning and welcome, it is with particular satisfaction that banco de portugal is hosting this conference, 10 years after the bank was given a far - reaching mandate in banking conduct supervision. the importance given to supervising the conduct of banking institutions in their relationships with customers and depositors is still relatively recent, although we now know that it is a fundamental duty to ensure the confidence of bank customers, and subsequently safeguard the stability of the financial system. i want to make three brief points in this opening address : the first point is about the growing importance of banking conduct supervision, from the perspective of safeguarding financial stability ; the second is on the approach followed by banco de portugal in this respect ; and finally a note about the digital challenge. importance and evolution of banking conduct supervision the international financial crisis reinforced the perception that the relationship between bank customers and credit institutions tends to be asymmetrical and the uninformed behaviour of bank customers generates risks to the financial system. this risk is greater : ( i ) the lower customers ’ financial literacy is, in terms of having specific skills and the knowledge required to make financial decisions tailored to risk, and ( ii ) the lower customers ’ financial skills are, in terms of their capacity to manage day - to - day expenses and anticipate and prevent the risk of future financial expenses or burdens. as a consequence, it has become clear that financial literacy and skills are a requirement for financial stability. sound or sustainable financial decisions made by each individual functioning in a given economic and financial space – especially bank customers – are key to financial stability. however, they are not enough in themselves, as economic agents do not consider and therefore do not incorporate the externalities that derive from their decisions or actions, particularly the systemic risk. this observation is especially important when the market is euphoric, as is the case with the residential real estate and mortgage markets. the intensity and propagation of distorted expectations of asset price increases are greater the lower the financial literacy and experience of a particular population. this means that an improvement in financial education contributes to financial stability but does not prevent negative externalities which threaten the stability of the financial

adequately kept in place and reinforced, the euro area will remain an area of sustained stability. ladies and gentlemen, where do central and eastern european countries enter this picture? i am convinced that enlargement of the european union and - in a later stage - of emu will strengthen central and eastern european countries ‘ positions and further enhance the importance of the euro as an anchor of stability. this brings me to the topic of our current east - west conference “ convergence and divergence in europe ” – a pivotal issue with regard to the afore - mentioned historic integration process in europe. as we all know, nominal convergence of inflation rates, interest rates, budget deficit and debt levels among initially 11, later 12 member states of the european union have ensured the launch of monetary union and the introduction of the euro. this process has been accompanied by long - term movements toward real convergence also of income levels, i. e. poorer eu member states have partly caught up in living standards with wealthier member states. yesterday, the first two sessions of this conference dealt with various aspects related to the history of european convergence in detail. the transition process in central and eastern europe and preparations for eu accession are to a large degree about convergence in a very broad sense. the economic systems in the region are now approaching market economy standards ; macroeconomic policy - making is pursued along the same principles as in western europe ; and institution building and human capital formation are proceeding. as we all realize, structural changes and modernization may often be very painful. on the other hand, privatization is largely completed in most countries of the region and strong flows of foreign direct investment have contributed to impressive advances in productivity and competitiveness. real convergence and the balance of real and nominal convergence have been the topics of the afternoon sessions. challenges for monetary and exchange rate policy were dealt with. as you know, the eurosystem proposes a three - step approach for monetary integration of accession countries : firstly, accession to the european union, secondly, entrance into erm ii, and thirdly, joining the euro area and the eurosystem. inflation continues to be on average somewhat higher and income - per - capita levels remain much lower in most “ transition economies ” than in the present - day european union. in my view, the pace of further disinflation in accession countries should be determined in line with the overall economic situation, in particular with the need of countries to increase real convergence. the maastricht inflation criterion should not be seen as