financial requirements for effective policy are conditional on our communications and the stability of our institutional position. as stated in the paper, the central banks have considerable loss - absorbing capacity even over and above their book equity and provisions, if only the present value of future seigniorage income is sufficiently high. so it is not only credit and market risks which are of consequence but the income stream as well. in this sense, a prolonged state of ultra - low interest rates might prove to be a challenge to central bank profitability in the long run, and reduce the risk bearing capacity of the central banks. the bank of finland routinely uses the var ( including expected shortfall ) methodology and also stress scenarios to assess the soundness of its financial position, and publicly reports summary statistics from its var calculations. these calculations show that the bank is able bis central bankers ’ speeches to absorb considerable losses with its provisions and reserves without endangering its capital position. which alternative financial structures might be desirable and feasible? the paper pinpoints the asymmetry of profit distribution as a major source of concern for central banks, especially if the volatility of profits ( including capital gains and losses ) is large compared to the average expected profit flow. the bank of finland suffered heavy losses during the finnish banking crisis of the early 1990s. in the ensuing two decades, the bank has been very successful in achieving a sound, well capitalized financial position which now after the international financial crisis is broadly appreciated in the finnish society. there have been both financial and political factors behind the favourable experience. • flexible rules on provisioning. we are able to book above - the - line provisions from unrealized capital gains which can then be used to cover future capital losses. moreover, the law allows us to book above - the - line provisions also for maintaining the real value of equity capital. • sensible rules on profit distribution. the basic scheme according to law is that half of the accounting profit of the bank be transferred to the reserve fund and the other half paid to the state. however, the law also says that exception can be made from this rule if the financial condition of the bank warrants such exception. it is the supervisory council of the bank, composed of parliamentarians, which makes the ultimate decision. after the finnish banking crisis of the early 1990s, it took until 2000 before any profits were transferred to the state. • the governance structure. the bank of finland is institutionally not subordinate to the government, but instead to the parliament

jose manuel gonzalez - paramo : the banking sector towards the “ new normal ” – some considerations speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the “ jornada de la banca ” organised by pricewaterhousecoopers ( pwc ) and ie ( instituto de empresa ) business school, madrid, 27 january 2011. * * * i am grateful to natalja benkovska, csaba more and balazs zsamboki for inputs into this speech. ladies and gentlemen : i. introduction it is a privilege for me to participate in this conference, dedicated to the very important topic of the challenges and opportunities that the banking sector will face when its ongoing restructuring process comes to an end and the new regulatory and supervisory framework is implemented. the organisers may be asking themselves ( and also asking us ) : “ and now, what? ” well, we may reply that now it is time for the “ new normal ”. this is a simple answer that entails a number of complex demands. this is why it is useful as a starting point to recall the recent past. the protracted financial crisis that we have experienced since 2007 has unveiled important sources of vulnerability in the financial system. these include weaknesses of the regulatory and supervisory framework of the banking sector, which failed to ensure the safety and soundness of financial institutions both individually and as a system. this has prompted the relevant authorities to pursue a number of reforms of the microprudential supervisory and regulatory framework, while also assigning central banks all over the world macroprudential tasks in recognition of the importance of the systemic component of financial stability. in addition, the crisis has shown that the relationship between financial development and economic growth is not really linear and that, when financial sectors become “ too large ” relative to their home economies, risks to financial stability and macroeconomic stability may arise. moreover, the crisis has undermined the sustainability of some business models that were rather widespread among large international banks, while also exposing the shortcomings of corporate governance and of the evaluation and management of the different sources of risk within financial institutions. there are of course many other lessons that we can draw from the crisis, but given the time constraints, the rest of my intervention will focus only on some key aspects of the regulatory reform, on issues related to the size of the banking sector, on the business models of banks and on their corporate governance. i will conclude with