. this would pose a financial stability risk to the extent that it hinders banks from building up capital through retained earnings and makes raising market equity too expensive. it would also affect monetary transmission for the same reasons. in fact, net interest income has remained quite stable over the past two years, even as overnight rates have drifted lower. and thanks to gains in other income components, banks ’ return on equity has been rising and is converging towards their cost of equity. for the banks under ecb supervision, return on equity has risen from 4. 4 % at the end of 2015 to 7. 1 % at the start of this year. this neutral impact of negative rates is largely due to the general equilibrium effects of monetary policy that we have explained many times : when policy is accommodative, the main components 3 / 4 bis central bankers'speeches of profitability largely offset each other, since the positive impact of a stronger economy on loanloss provisions largely cancels out any negative effect on net interest income. 3 see altavilla c., boucinha, m. and peydro, j. - l. ( 2017 ), “ monetary policy and bank profitability in a low interest rate environment ”, working paper series, no. 2105, ecb, october. for some banks, however, these negative effects may be larger than for others. this is where strong supervision is again crucial. as part of its srep, ecb banking supervision carries out detailed, comparative assessments of banks ’ business models, which feed into the ongoing supervisory dialogue between the supervisory teams and banks. this process is not prescriptive, but it helps bring to light important issues such as the sustainability of banks ’ business models in a low rate environment, and their operating costs in comparison with their peers, which in some countries are a contributing factor to low profitability. conclusion let me conclude. we are now three years into the life of european banking supervision, and the track record so far is encouraging. though the single supervisor is still a young and developing institution, it has in many ways lived up to the high expectations that accompanied its founding. rigorous and uniform supervision has led to higher levels of capital and a more resilient sector overall. the credit risk of banks is now less determined by the credit risk of their country of establishment. healthier banks have, in turn, helped transmit the ecb ’ s accommodative monetary policy more evenly across the

euro area, leading to a stronger and broader recovery. and the new supervisory framework has helped mitigate any financial stability risks that might have arisen as a result. in short, european supervision and european monetary policy have proven to complement each other well. it is an approach which confirms the synergies that can be reaped when the right policies are combined at euro area level. see, for example : buch, c. m. and prieto, e. ( 2014 ), “ do better capitalized banks lend less? long - run panel evidence from germany ”, international finance, vol. 17 ( 1 ), pp. 1 - 23 ; kapan, t. and minoiu, c. ( 2013 ), “ balance sheet strength and bank lending during the global financial crisis ”, discussion papers, no 33, deutsche bundesbank ; and osborne, m., fuertes, a. m. and milne, a. ( 2017 ), “ in good times and in bad : bank capital ratios and lending rates ”, international review of financial analysis, vol. 51, may, pp. 102 – 112. 2 see jimenez, g., ongena, s., peydro, j. - l. and saurina, j. ( 2014 ), “ hazardous times for monetary policy : what do twenty - three million bank loans say about the effects of monetary policy on credit risk - taking? ”, econometrica, vol. 82 ( 2 ), march, pp. 463 – 505. 3 see altavilla c., boucinha, m. and peydro, j. - l. ( 2017 ), “ monetary policy and bank profitability in a low interest rate environment ”, working paper series, no. 2105, ecb, october. 4 / 4 bis central bankers'speeches