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

file a claim against the state even though the central bank has nothing to claim but rather has to defend itself, and what is more, to defend the diligence it has exercised against an implicit presumption of wrongdoing and an ambiguous standard of assessment. conclusion let me conclude. a well - functioning financial system is of vital importance for long - term, sustainable economic growth. the crisis laid bare elements of the financial system that were not functioning in the smooth and efficient manner required. the new regulatory regime put in place since the crisis provides the right framework for the banking system to function better in the future. but work remains to clear up the legacy of the crisis, particularly in terms of the overhang of npls. regulation alone is insufficient, and further effort is required of banks, in terms of both consolidation and refining business models, to return the sector to sustainable rates of profitability. but efforts are also required at national level to make national institutions function in line with european legislation. payment services is a further area where regulatory advances are of themselves insufficient to provide a working system that operates in a smooth and efficient way, that is still safe and respects european privacy provisions. banks now have a great opportunity to embrace the new technology and serve their customers in a new fashion. agreeing and implementing technical standards in a timely fashion will help foster the right conditions for a payment system that benefits everyone. 1 european central bank ( 2017 ), 2017 report on financial structures. 2 mersch, y. ( 2017 ), “ central banking in times of technological progress ”, speech at the bank negara malaysia 4 / 5 bis central bankers'speeches monetary policy conference, kuala lumpur, 24 july. 3 mersch, y. ( 2017 ), “ digital base money : an assessment from the ecb ’ s perspective ”, speech at the farewell ceremony for pentti hakkarainen, deputy governor of suomen pankki – finlands bank, helsinki, 16 january. 5 / 5 bis central bankers'speeches