securities commissions ( iosco ) principle of a waterfall approach to rate determination, which the ossg has endorsed. according to this principle, benchmarks should be based on, in order of preference, actual transactions, live tradable prices, and expert judgement. another key recommendation, this time proposed by the ossg, is that derivative contracts should reference a rfr rather than the current practice of referencing an ibor, which contains bank credit risk. keeping these two key recommendations in mind, let me now provide a brief recap on the progress in the reform efforts of libor. 1 such as the bank for international settlements ( bis ), the international organization of securities commissions ( iosco ), and the financial stability board ( initially through the market participants group ( mpg ) and since july 2014 through the official sector steering group ( ossg ) ) page 2 of 13 alternatives for libor libor, being the most widely referenced ibor, has been the centre of attention. the scale of its use is estimated to be in the hundreds of trillions of us dollars. yet, the volume of transactions that underpin libor is nowhere near the gross notional value of financial products referencing the rate. in fact, the alternative reference rate committee ( arrc ) in the united states ( us ) has published a report showing that, while exposure to libor has grown, the volume of transactions underlying libor has been declining. 2 the scarcity of underlying transactions has been viewed as rather problematic, as it has already resulted in increased conduct risk, despite efforts to strengthen governance processes around benchmark determination. furthermore, as the ratio of underlying transactions to the gross notional value of financial contracts referencing libor continues to dwindle, the risk that libor will not be sustained over the long term increases. from a policymaker ’ s perspective, this mismatch poses risks to the stability of the global financial system, especially given the systemic importance of libor. cognisant of these risks, libor currency areas have moved to identify alternative reference rates to replace libor amid growing consensus that, at some point, libor will cease to exist – not least because the financial conduct authority has already made it known that it will not persuade or compel banks to submit libor beyond 2021. and somebody has jokingly changes the lyrics of the famous song “ killing me softly with his song ” to ‘ killing it softly with bailey ’ s song ’. finding and agreeing on new reference rates

economic theory, 149, 2014. the annual growth rate of the narrower aggregate, including currency in circulation and overnight deposits ( m1 ), decreased to 8. 6 % in june, from 9. 1 % in may. see ecb, “ monetary developments in the euro area : june 2016, ” https : / / www. ecb. europa. eu / press / pdf / md / md1606. pdf. bis central bankers ’ speeches more pronounced when rates enter negative territory, due to a potential zero lower bound for retail deposit rates. slide 9 illustrates average loan and deposit rates for both non - financial corporations and households in the euro area. 25 [ slide 9 : euro - area banks : interest rates on new loans and deposits ] the vertical red line indicates june 2014, the first time deposit facility rates became negative in the euro area. the gap between loan rates and deposit rates narrows because declining rates are passed on more strongly to loan rates than to deposit rates, indicating that there indeed seems to be a zero lower bound for deposits. while average deposit rates only decreased by around 0. 2 percentage point between june 2014 and may 2016, loan rates decreased by around 0. 8 percentage point, effectively reducing the interest margin. this is also shown on slide 10, using profit and loss data of a group of large euro area banks, which on average indeed have seen a reduction of their net interest margins – defined here as net interest income over total assets – since mid - 2014. [ slide 10 : euro - area large banks : net interest margin ] but what about overall income? ecb staff estimates show that the overall impact on bank profitability of recent monetary policy actions is net positive, compared with a scenario without any monetary policy action. 26 [ slide 11 : monetary policy and bank profitability : estimates ]. decreasing net interest income and charges on excess liquidity do put pressure on bank profitability. but there are also two strong positive effects of lower rates. first, the positive impact of lower rates on the macro environment reduces firm default risk and lowers the debt servicing cost of borrowers, which should improve credit quality. second, lower rates will lead to capital gains on the bond portfolio of banks. the ecb ’ s latest financial stability review [ 27 broadly confirms these model - based estimates. as slide 12 shows, the net income of euro area significant banking groups actually increased between 2014 and 2015 [ slide 12 : euro - area large banks : aggregate net income ]. this was mainly