the euro area such requirements are applied to all banks. of course, such regulations have been put in place in recognition of the significant public costs borne throughout the banking crisis. and regulation cannot be seen as the main driver of costs – nordic banks operate under the same regulatory framework and have been able to attain a high rate of profitability. but one key element in regulation worth noting is the lack of waivers for liquidity and capital in the euro area. as a result, euro area cross - border banking groups potentially face higher costs than interstate banking groups in the united states. 3 / 5 bis central bankers'speeches this recourse to ring fencing takes a narrow national perspective. at present, national deposit insurance schemes will be drawn upon should depositors need to be compensated during bank resolution. hence the desire of national authorities to ensure that each national subsidiary is sufficiently capitalised and has adequate liquidity. completing banking union, including the introduction of a european deposit insurance scheme and the removal of the remaining national options and discretions, would help ensure that the costs of resolution are equitably shared. meanwhile, it would enable banks to use liquidity and capital efficiently at the euro area level. competition from outside the sector the final challenge for bank profitability comes from increasing competition from outside the sector, in particular from financial technology companies ( fintech ) and non - bank financial companies. lightly regulated fintech companies have begun to encroach into the realm of payment and settlement systems. more than 60 % of incumbents view fintechs as a threat to their income from these activities. 13 given the greater desire by consumers for instant payments and the use of mobile payments, investment in it is vital to secure future revenue streams. banks also face increasing competition in the provision of credit. total assets of non - bank financial intermediaries doubled in the euro area between 2008 and 2017, whereas total banking sector assets remained broadly unchanged. the growth is particularly marked in the investment fund sector. around 28 % of euro area non - financial company debt issuances are held by euro area investment funds, compared with 18 % pre - crisis. the greater provision of market - based credit is welcome, and indeed the capital markets union agenda has been put in place with this aim in mind. but banks will need to carefully consider how to adjust their business models to accommodate this greater degree of competition. it certainly increases the urgency to improve efficiency in credit provision. conclusion let me conclude. the structurally low profitability of

be divided into cyclical factors, cost inefficiencies and competitive challenges arising from outside the sector. before discussing these sources, let me begin by reminding you why bank profitability is important. why bank profitability matters clearly, bank profitability matters for financial stability. profits are the first line of defence against losses from credit impairment. retained earnings are an important source of capital, enabling banks to build strong buffers to absorb additional losses. those buffers ensure that banks are able to provide financial services to euro area households and businesses, even in the face of adverse developments, thereby smoothing rather than amplifying the impact of negative shocks 1 / 5 bis central bankers'speeches on the real economy. banks with poor structural profitability can face higher funding costs and may be tempted to take on more risk. 2 within the euro area, weak banks are more likely than healthy banks to be connected to unprofitable firms. 3 this reduces the flow of lending to profitable firms that need funding to invest and grow. the resultant misallocation of capital 4 towards unproductive businesses weighs on long - run economic growth. 5 low bank profitability can also matter for monetary policy by impairing the accumulation of bank capital over time. thinly capitalised banks stymie the ability of monetary policy to stimulate economic activity in downturns. their capacity to lower the interest rates they charge their customers and increase the volume of lending to the real economy is constrained. 6 this limits the effectiveness of an important transmission channel of monetary accommodation in the euro area, which relies on bank lending supporting consumption and investment. as the crisis showed, dislocations in the banking sector can deepen recessions and seriously impair the smooth transmission of monetary policy across the euro area. that risk remains today. we recently carried out what we call a macroprudential stress test, which assesses this amplification of shocks using a micro - macro model that feeds back individual bank reactions into macroeconomic outcomes. on the basis of the 2018 european - wide stress test data, we estimate that the banks ’ behavioural reaction to the adverse scenario exacerbates the fall in gdp by a further 1. 6 % with respect to the initial shock, which itself further depletes banks ’ capital. 7 cyclical factors given that important link between bank behaviour and the cycle, let me turn to the cyclical factors affecting bank profitability in the euro area. the economic expansion continued through 2018, although with