yves mersch : europe in transformation - structural, regulatory and technological challenges for the markets of tomorrow speech by mr yves mersch, member of the executive board of the european central bank, at the slovenian banking days conference, brdo pri kranju, slovenia, 6 november 2017. * * * banks play a vital role in the economy, matching surplus funds from savers to those wishing to invest in profitable projects – a process that contributes to the growth in productivity and overall welfare. it is also a process that plays an important role in the transmission of monetary policy, which means that monetary policymakers, such as myself, take great interest in the structure and performance of the banking sector. from this point of view too, it is important that the sector operates in an efficient and smooth fashion. during the crisis, banks in the euro area did not operate in this way, and their failure to do so exacerbated the impact of the crisis on people and on the economy. this will be the focus of my talk today. banks face a number of challenges, visible in the weak financial performance of the sector, with low price - to - book ratios and meagre profitability. compared with the pre - crisis status quo, profound changes in the sector in terms of structure and business models will be needed to tackle those challenges. broadly speaking, the challenges are threefold : structural, regulatory and technological. structural challenges we are now a decade after the onset of the crisis. yet despite the ongoing broad - based recovery in the euro area economy, bank profitability remains low. in part, the roots of that continued poor performance lie before the crisis, which served to expose structural issues within the european banking sector. chronic overcapacity had resulted in poor profitability and too much lending to marginal projects which eventually turned sour. that stock of non - performing loans ( npls ) remains high in some countries and continues to depress bank profitability today. at the end of 2016, the stock of gross npls in the eu banking sector was around €1 trillion. this npl overhang is tying up bank capital in failed or failing ventures and preventing the efficient flow of new lending to profitable projects. how should banks react to this challenge? first, we should recognise that europe remains overbanked. although progress has been made on this front, with 25 % fewer credit institutions in the euro area now than in 2008, 1 there is considerable scope for consolidation within some countries and across borders

policy - makers and the information set accessible to the public that prevailed in the old days with the recurrent pattern of stop - go episodes that plagued the monetary policy history of the 1970s. in the new regime, in which policy - makers are dedicated to being open and transparent, communication channels offer some more lines of defence in the face of such situations. providing the economic interpretation of the situation, the judgement and economic thinking around it, and the central bank ’ s assessment of future directions can correct faulty expectations at source. this can minimise the risk that inaccurate forecasts might induce misallocations of resources and derail the economic course. communication does not substitute for action. but it can help fill the information gap on which the need for action is sometimes predicated. the ecb ’ s approach to communication and its efficacy communication is a constituent part of the institutional design for monetary policy and needs to be styled according to the principles and constraints that shape those institutions. there are recognizable differences in the ways central banks communicate to their publics. these differences are not accidental : they can be traced to the economic, political and institutional factors that face individual central banks. gurkaynak, r., a. levin, and e. swanson ( 2006 ), “ does inflation targeting anchor long - run inflation expectations? evidence from long - term bond yields in the us, uk and sweden ”, federal reserve bank of san francisco working paper no 2006 - 09. ehrmann et al. ( 2007 ), “ convergence and anchoring of yield curves in the euro area ”, ecb working paper no 817. orphanides a., and j. williams ( 2005 ), “ imperfect knowledge, inflation expectations, and monetary policy ”, in b. bernanke and m. woodford ( eds. ) : the inflation targeting debate, chicago : university of chicago press, pp. 201 - 234. the ecb is no exception and it has elaborated its own communication framework. since the very start in october 1998, the ecb has announced its monetary policy strategy – a quantitative definition of price stability and a two - pillar, medium - term orientated analytical framework, comprising of an economic and monetary analysis for the assessment of risks to price stability. in doing so, it laid the foundations for a high degree of credibility and emphasised its commitment to being open and transparent. in particular, by formulating and publishing a quantitative definition of price stability – below, but close to 2 %