by sales spirals and queues at the exit, which may have a knock - on effect across asset classes. a shortage of liquidity in the market could further accelerate the process. there are currently no indications that major systemic risks have built up in the danish financial system. all the same, there is reason to be on guard. credit institutions should ensure that they are able to withstand both direct losses due to price adjustments for financial assets and the derived effects of the potential market turmoil triggered by such adjustment – e. g. because market access becomes more difficult. turning to the real economy, the danish economy has grown since the end of 2012 if we adjust for falling output of north sea oil and gas these years. growth has been driven mainly by domestic demand. developments in the labour market have been positive over the last year. employment has risen sharply, and unemployment has fallen. according to danmarks nationalbank ’ s estimate, the current unemployment gap is only around 10, 000, so if the recovery continues, bis central bankers ’ speeches it will soon close. the potential for increasing the labour force is greater, but this is also more difficult. inflation is also low in denmark due to factors such as falling oil prices. in the coming months, price inflation will remain low, but looking ahead we can expect inflation to pick up as the effect of falling energy prices fades away. interest rates in denmark have continued to fall, to historical lows, and the low level of interest rates is set to continue for some time yet. in spite of this, investment activity is low and corporate savings high. this is the case not only in denmark but in most advanced economies and no - one can really say when this circle of restrained private consumption and low investment appetite will be broken. it is not purely bad that corporate savings are high. other things being equal, a firm is more robust to economic shocks the higher its equity is relative to its total assets. that reduces the risk that the firm will fail. it also reduces the probability that the firm ’ s bankers will suffer losses on their lending to the firm. hence, a high solvency ratio has a positive impact on financial stability. a high solvency ratio also gives the individual firm greater flexibility when choosing between alternative sources of funding and greater certainty of obtaining the desired funding. an analysis by danmarks nationalbank shows that since the financial crisis erupted, loan capital in the danish banking system has to a large extent flowed to the soundest, most profitable and productive

likely, the net impact of taxes and subsidies is close to zero. the absence of any significant carbon pricing has implications. first, it will be significantly more difficult to cut emissions in the absence of spectacular technological advances, which we yet have to see. second, in addition to the cost implied by physical effects of climate change – such as flooding and droughts – the economic cost of mitigation will be substantially higher than if driven by price incentives. regulated energy and emission standards have a significant potential, but are less efficient. third, we have to hope, if we do not promote, that technological advances have a climate - friendly bias. this may well have been the case in recent years as the costs of renewable energy and energy savings have come down substantially and are now competitive. but many of us underestimated the technological advances also taking place in the extraction of fossil fuels, such as shale gas and deep water drilling. as regards financing, climate - friendly investments would have been more attractive in a world of appropriate pricing and regulation of carbon. the absence of such policy action implies that we cannot expect financing to deliver as much as we would like. attracting financing on a large scale requires a strong enabling environment. investors seek the highest risk - adjusted return. but the 1 / 2 bis central bankers'speeches financial sector and financial authorities can and should nevertheless complement the fight against climate change, also with current public policy settings. what are the opportunities from the financial sector perspective? first, lots of profitable climatefriendly investment projects exist already. some on a large scale. in my country of origin, denmark, we have numerous encouraging examples of companies and institutional investors contributing to and benefiting from the transition to a low - carbon economy – both at home and abroad. others on a small scale ; simple efforts to save energy in households and firms. note that the low interest rate environment has shifted the investment balance in favour of upfront efficient capital and against outlays for energy year after year. second, the financial sector has to care about reputational risks. it will get questions from customers and the media. banks begin to check companies for their esg strategies before lending, out of concern for both risks and reputation. third, the financial sector should prepare for potentially stronger climate - friendly policies set by governments down the line. obvious and profitable climate - friendly investment needs often exist in areas of the world with difficult physical, economic or regulatory environments. such barriers can be reduced with technical assistance. these are