analytical underpinnings of the ecb ’ s strategy, which have granted a prominent role to the bank - based transmission mechanism in the context of our monetary pillar, are well - suited for this task. at the same time, many other factors, relating to legacy and structural problems, are holding down bank profitability. hence a durable improvement in the prospects of the euro area banking system requires further efforts outside the realm of monetary policy. these include, notably, the swift and thorough completion of banking union. additional adjustment in the banking sector towards greater cost efficiency and business models that remain viable in the new regulatory and macroeconomic environment is also needed. for some parts of the banking system, these adjustment needs have arisen because of regulation discouraging unsustainable pre - crisis business models that were highly reliant on aggressive leverage and maturity transformation, regulatory arbitrage ( in particular via offbalance sheet activities ), and a lack of transparency and due diligence in the origination of financial products. in others, the adjustment needs reflect structural challenges and overcapacity. in both cases revenue sources will have to be augmented by more sustainable 7 / 8 bis central bankers'speeches business models that are consistent with the new policy environment. beyond the banking sector, policy needs to pave the way for a more dynamic recovery and – even more importantly – a more favourable end - point of that recovery. for the crisis has not just led to an underutilisation of economic capacity, but has also reduced the pace at which economic capacity itself expands – its potential growth. pre - crisis, the potential growth rate in the euro area, on average, amounted to almost 2 % per annum ; after the crisis, this growth rate roughly halved. the implications for economic prosperity are striking : an economy growing at 2 % more than doubles over a 40 - year period ; an economy growing at 1 % expands by less than half over the same horizon. meanwhile a strong economic basis is essential to cope with other challenges facing the euro area over the longer - term. these include the burden of high legacy debt, large implicit liabilities related to unfunded pension claims, and intensifying distributional concerns in the context of a widening income gap. we are therefore facing a mixed outlook. the cyclical recovery is proceeding at a moderate pace and, despite continued downside risks, has proven resilient to a range of adverse external shocks. the ecb ’ s accommoda

the underperformance of bank equities may actually be testament to such concerns. of course, weak bank equity markets are not, in the first instance, a public policy concern. but they may become such concern if they persist and morph into a systemic phenomenon. the reason is that the newfound financial resilience of the euro area banking system can only be sustained if it is accompanied by improved financial performance in the future. otherwise, banks will struggle to generate capital organically or raise equity in capital markets, which is the cushion that allows banks to weather adverse shocks, retain or even increase their exposure to the real economy, respond to potential regulatory changes, and attract future investors. and, besides the dampening effects on their own financial resilience, this scenario would put a dent into the contribution that banks can make to the economic recovery : deteriorating earnings prospects weigh on bank equities, which in turn increases the cost banks face when raising equity in the market. while this increase in the cost of equity may initially be compensated by the substitution of equity with debt funding, the scope for such substitution is limited by regulatory requirements and banks ’ own motives to establish adequate capital buffers. hence, a persistent decline in equity valuations will ultimately render credit more costly and less profitable for banks which, in response, may curtail lending to the real economy. this adverse link from low interest rates to weak bank profitability to lower loan supply is particularly problematic in view of evidence suggesting that the low interest rate environment is likely to persist for an extended period of time. according to this evidence, declining potential growth together with a relative scarcity of safe assets to absorb global savings have led to a declining natural interest rate – that is : the rate consistent with full resource utilisation and steady inflation rates around the central bank objective over a longer - term perspective. in the context of such decline of the natural rate and the continued cyclical weakness, the necessary degree of monetary policy accommodation implies a constellation of very low interest rates for an extended period of time. therefore, the ecb will preserve its accommodative stance until inflation returns to our aim, which will remove some of the cyclical drivers of weak profitability linked to disappointing nominal growth. it will be crucial to continue monitoring the implications of our monetary policy measures on the position and prospects of the banking system and approach any future re - calibration of our monetary policy toolkit, should this be necessary at all, in a way