##s were hit hard amid concerns over a further weakening in their profitability prospects, which were already subdued well before the pandemic shock hit the economy. this mainly reflects expectations that banks ’ credit losses are set to increase, as they will increasingly be confronted with missed payments and a growing number of corporate defaults over the coming quarters. as a result, analyst forecasts of bank profitability for 2020 have undergone large downward revisions in recent months, mainly driven by expectations that banks need to increase their provisions for future credit losses. in fact, banks ’ first quarter results already show a considerable negative impact from the crisis in the form of a sharp deterioration in profitability, driven by large increases in loan loss provisions in both the euro area and the united states. looking beyond cyclical challenges, euro area banks ’ profitability prospects are further hindered by ongoing structural problems. low cost - efficiency and weak income - generation capacity in some parts of the banking sector, both linked to overcapacity, continue to weigh on banks ’ longterm profitability prospects. recognising the challenges at this juncture, consolidation via mergers and acquisitions could be one potential avenue for reducing overcapacity in the sector. micro - and macroprudential authorities have also acted swiftly and introduced a range of relief measures to help the banking system maintain the flow of credit. ecb banking supervision has allowed banks to temporarily operate below the level of capital defined by pillar 2 guidance and the combined buffer requirement. banks are now also allowed to meet pillar 2 requirements with 3 / 4 bis central bankers'speeches lower quality capital as a result of the early introduction of an amendment to the capital requirements regulation. it furthermore enhanced flexibility in accounting rules and the recognition of non - performing loans. furthermore, ecb banking supervision recommended that banks limit capital distribution by refraining from paying dividends or buying back shares. on the macroprudential side, national authorities have either announced a full release of countercyclical capital buffers or revoked previously announced increases to these buffers. authorities have also released or reduced buffer requirements for structural risks and delayed the implementation of new requirements. looking ahead, financial stability concerns will crucially depend on the shape of the economic recovery. taken together, these measures should help the euro area banking system to sustain lending to households and companies while weathering losses. complementing these prudential measures, government loan guarantee schemes have the potential to offset at least some of the losses. the effectiveness of these

lucas papademos : the ecb ’ s accountability towards the european parliament introductory statement by mr lucas papademos, vice president of the european central bank, at the presentation of the ecb ’ s annual report 2009 to the committee on economic and monetary affairs of the european parliament, brussels, 27 april 2010. * * * dear madam chair, dear honourable members of the committee on economic and monetary affairs, it is a privilege to present to you today the ecb ’ s annual report for 2009. this presentation is a cornerstone of the ecb ’ s accountability towards the european parliament. in my introductory statement, i will first briefly review the key economic and monetary developments in 2009, summarise our current assessment of the macroeconomic outlook and explain our monetary policy decisions. i will then focus on two highly topical policy issues, namely the current fiscal policy challenges in the euro area and the planned reform of financial regulation and supervision in the eu and globally. before doing so, i should like to highlight an important event in 2009 : the entry into force of the lisbon treaty on 1 december 2009. the new treaty substantially increases the powers of the european parliament. it also gives the ecb the status of a union institution and strengthens its independence by explicitly anchoring the ecb ’ s institutional features and financial independence in primary law. moreover, the lisbon treaty emphasises the importance of the eurosystem ’ s mandate by making its primary objective of maintaining price stability an objective of the eu as a whole. economic developments and monetary policy in 2009 the european central bank performed its functions in an exceptionally challenging environment as the global financial crisis continued to unfold. following the severe intensification of financial market tensions in autumn 2008, euro area real gdp contracted by 4. 0 % in 2009, largely driven by a sharp decline in exports and in private investment. the decrease in private consumption was relatively contained, although households increased their saving rates substantially. economic activity in the euro area reached a trough in the second quarter of 2009 and has increased at a slow pace since then. the significant macroeconomic stimulus, the measures taken to support the financial system, and the pick - up in global activity have underpinned the recovery of the euro area economy. looking ahead, the governing council expects real gdp to continue to expand at a moderate pace in 2010 and to strengthen further in 2011. this expectation is in line with the latest ecb staff projections and the forecasts of other institutions. the recovery is likely to be uneven