at rates as low as the negative dfr which strengthens the transmission of our conventional policy to the real economy. moreover, this builds on the successful targeted long - term refinancing operations ( tltros ) which were introduced in september 2014 and have greatly helped in bolstering the bank lending channel. the expectations which we held when we first designed the measures introduced in summer 2014 are being validated by the incoming data. borrowing costs for nfcs and households have significantly declined and cross - country heterogeneity continues to recede ( see chart below on cost of borrowing ). loan growth to the euro area non - financial private sector has been recovering and according to the latest bank lending survey ( bls ), there has been a continued net easing of banks ’ overall terms and conditions for loans to enterprises and increases in loan demand across all categories. notwithstanding the impact in improving financial conditions faced by the real economy, the instrument of negative dfr has clear limits and we need to monitor the possible occurrence of undesirable side - effects. the first limitation is the risk that, after a certain point, the policy could trigger an increase of preference for cash which would be disturbing. nevertheless, at present levels, the risk is not in the horizon as negative rates are not being passed on by the banks to depositors. negative interest rates can also be a source of concern for their impact on banks ’ profitability. in examining this issue, it is important that our measures are viewed in their entirety. therefore, the impact of the overall effects of our purchase programmes and our credit easing measures on bank profitability go far beyond the negative dfr. our policy stance leads to capital gains on the securities held by banks and to lower funding costs. furthermore, the positive macroeconomic effects support the demand for credit. this in turn increases intermediation volumes, contributes to increase credit quality and decreased banks ’ costs associated with loan losses. as a result, these effects can offset the negative impact on banks ’ net interest margin brought about by lower interest rates on banks ’ assets. in 2015, the first full year of negative dfrs, net interest income increased and we estimated that, on average, the cumulative effect of our policies until 2017 will continue to be overall positive for banks ’ profitability. nevertheless, there are limits to the use of negative rates, if maintained over a protracted period of time. for example, at some stage, banks may be passing on the cost of

of safe and liquid assets to be posted in collateralised transactions. central banks have, of course, contributed to the compression of premia via their quantitative easing programmes, and i will come back to this. the final component affecting the long - term nominal interest rate is the expected path of the short - term real rate over the life of the asset. although the real rate has declined at all horizons, it is helpful to partition this path in terms of the front and intermediate segment, and the longterm in order to better understand the drivers of these developments. first, over the short and medium run, the balance between savings and investment, and therefore the real interest rate, is also affected by many factors of more cyclical nature. since the global financial crisis in 2008, these factors have predominantly exerted downward pressure on the real interest rate. in the case of the euro area, it has still not emerged from its “ balance sheet recession ”, where a severe debt overhang and tightening of credit standards have required a substantial amount of deleveraging of both private and public sector balance sheets, thus reducing investment and prolonging the downturn. furthermore, it takes time to reabsorb the over accumulation of capital and capacity that occurred prior to the crisis. overall, that growth remains weak in the years after a banking crisis is certainly not atypical and has been well documented ( reinhart and rogoff, 2009 ). second, in the long - term, market expectations about future monetary policy rates are being very much influenced by the difficulty in normalising inflation and by the pessimistic views about the long run growth prospects of the advanced economies which i will address later. another way to operationalise the longer - term notion of the real interest rate is to take real forward rates and remove the real forward premium. an advantage of using market - based measures to derive an estimate of the equilibrium real rate is that they are forward - looking and available on a daily basis ( bomfim, 2001 ). that being said, this measure is also subject to bis central bankers ’ speeches significant shortcomings. first, removing premia rests on a model and results are usually very sensitive to model specifications. second, whereas the focus is on the expected real rate in the distant future, this is the part of the model exercise that may be particularly uncertain. third, market expectations cannot measure the equilibrium real rate per se, but only the market perception of it, which can be