klaas knot : introduction to the press conference on the financial stability report introductory remarks by mr klaas knot, president of the netherlands bank, at the press conference on the financial stability report, amsterdam, 9 october 2023. * * * good morning everyone and a warm welcome to this press conference on the financial stability report. i would like to start with a brief outline of the key messages from the fsr and i will then be happy to answer your questions. economic outlook first, let me reflect on the economic outlook. since the high inflation peak last autumn, inflation has started to decline, but is expected to remain above 2 % for some time to come. this is why central banks have been tightening monetary policy further over the past year. with 10 rate hikes in 14 months, the ecb has lifted the policy rate from - 0. 5 % to 4. 0 %, which is a fast pace viewed from a historical perspective. rising interest rates have made it more expensive for households and businesses in the netherlands to borrow money. these tighter financial conditions are becoming increasingly evident in the economy, and they are a necessity if we are to bring inflation back down to our 2 % target. as a result, we see economic growth in the netherlands slowing down. at the same time, the labour market is expected to remain tight in the coming years, keeping unemployment low. this persistent tightness is contributing to higher wage growth and the gradual pace at which inflation is normalising. risks inherent in transitioning to higher interest rates the rapid transition to higher interest rates also changes the risks to financial stability. in themselves, the higher rates have a positive impact on the financial system. for example, the increase in bank profits and higher funding ratios at pension funds show that higher interest rates are in principle beneficial for financial institutions. likewise, investors in financial markets seem to have been pricing in risk again recently, reducing their incentives to invest in riskier asset classes. but there is always a flip side : in fact, the transition to higher interest rates may also expose accumulated vulnerabilities and create new risks to financial stability. let me highlight two key examples of such risks, which are also discussed in the financial stability review. first of all, the transition to higher interest rates impairs the sustainability of government debt, as higher rates cause sovereign debt to weigh more heavily on government budgets. this also applies to netherlands, although its government debt is still relatively low. adjustment is needed to ensure future compliance

. banks also now face competition from newcomers that are not held back by legacy it systems. they will therefore need to implement efficient digital solutions for their customers, find economies of scale and ensure the highest levels of it security. at the same time, digitalisation doesn't mean the end of face - to - face interactions between banks and their customers : some people still want to go into their local branch in person, especially older people and those carrying out more complex financial transactions. the ability to respond to customers'evolving needs will be crucial for the future of established banks. they are facing competition from new financial service providers that are trying to attract business in the most profitable segment of banking operations : payments. in addition, banks need to make major investments in their cyber and it resilience to stay at the forefront of technological developments and prevent disruptions or breaches. investment in it will be key to ensuring the banking sector remains sound and competitive in the future. economies of scale and a more integrated eu market are likely to be needed in order to absorb the cost and boost profitability. that's a key point : it investment needs to be strengthened to maintain competitiveness vis - a - vis us peers. a study last year3 observed that the annual it budget for us global systemically important banks ( g - sibs ) in 2021 was around 0. 36 % of total assets, compared with 0. 19 % for euro area g - sibs. therefore, one of our supervisory priorities at the ecb is assessing how banks formulate, implement and monitor their digitalisation strategies, and how they manage the related risks. building on our findings and surveys, we recently published criteria and best practices for banks'digital activities. 4 but some questions related to technology are far from being solved. generative artificial intelligence ( ai ) tools have the potential to transform some parts of the banking business, although as yet there is no clear evidence that they have been fully incorporated into banks'digitalisation strategies. crucially, consumer rights and privacy must also be respected when issues related to ai are being addressed. and without good it systems, ai tools won't be correctly fed by banks'data. let me conclude. the ecb's mandate to keep banks safe and sound makes a critical contribution to the overall competitiveness of the banking sector. and this works both ways, as the resilience of the banking sector is also about its competitiveness. we are therefore looking closely at the sustainability of