as workers, entrepreneurs, investors, borrowers and taxpayers. similarly, there are several channels through which our policies affect pension systems. yes, lower rates increase the present value of future liabilities of pension schemes. however, the liability side of pension schemes is only one part of the equation. what happens on the asset side is also important. and our monetary policy has had a beneficial impact on this side of the equation as the value of the investment portfolio has increased. also, let ’ s not forget that our monetary policy supports pension systems indirectly by supporting employment growth and thus pension contributions. in any case, it is ultimately up to sound governance structures and longterm strategies to ensure the financial health of pension systems. equally, monetary policy can have an impact on bank profitability through various channels. our assessment is that so far these effects tend to largely offset each other in aggregate terms. low rates might reduce bank profits through the narrowing of net interest margins. yet, at the same time, by supporting the recovery, accommodative monetary policy reduces delinquencies and defaults, including on mortgages. improved credit quality coupled with higher lending volumes and an improved market value of assets supports bank profitability. of course, depending on the strength of their balance sheet, some banks may be more affected than others. also banks facing structurally high cost - to - income ratios or limited diversification of income sources might have to revamp their business models regardless of the low interest rate environment. finally, let me also address the risks of overheating in some parts of the financial markets. we do not currently see compelling evidence of overstretched asset valuations at the euro area level, but we do see that real estate dynamics or high household debt levels in some countries signal the risk of increasing imbalances. such risks also exist in the netherlands : they relate to the continued very high level of household indebtedness and the low level of mortgage collateralisation. for this reason, we share the concerns expressed in the warning issued by the european systemic risk board in november 2016 and recognise that there is a case for mitigating measures. that being said, monetary policy is not the appropriate tool for addressing local and sectoral financial risks. rather, targeted macroprudential policies, which can be tailored to local and sectoral conditions, are the right answer. 1 the way forward against the backdrop of a recovery that is becoming increasingly solid, the benefits of our policy clearly outweigh

policy against this background – the prospect of stronger and more protracted inflationary pressures than previously envisaged and the assessment of the increased upside risks to price stability over the medium term – the governing council indicated that it is in a state of heightened alertness and ready to act in a firm and timely manner to prevent second - round effects and ensure that risks to price stability over the medium term do not materialise. the governing council also emphasised its commitment to maintain price stability in the medium term and its strong determination to secure a firm anchoring of medium and long - term inflation expectations in line with price stability. financial markets let me now turn to financial market developments and the financial stability outlook in the euro area. the financial system of the euro area is still undergoing further adjustment as the processes of risk repricing and de - leveraging continue. the stresses on the financial system have persisted longer and they have become broader and deeper than anticipated six months ago. although there have been some signs of easing tensions in certain markets since mid - march, elevated pressures remain in others, notably in the term money markets of major currencies. moreover, high uncertainty surrounds the future dynamics of property prices, the magnitude of possible further asset valuation write - downs by financial institutions and the effects of the market turmoil on the broader economy. over the past two months, money, credit and other financial markets appear to be sending mixed signals. the term money market spreads between euro deposit and eonia swap rates have remained high and close to record levels, for maturities from three to twelve months. tensions in the term money market continue to be a global phenomenon. currently, the spreads between three - month deposit and overnight - indexed swap rates are virtually the same in the euro, us dollar and pound sterling money markets. in the credit markets, greater risk awareness by banks and increased bank funding costs have been reflected in the significant and general further tightening of lending standards in the euro area, the uk and the us. at the same time, credit default swap ( cds ) indices in europe and the us have declined since mid - march ( though recently they have increased somewhat ), the availability of bank credit to households and non - financial corporations in the euro area has not been significantly affected by the financial market turbulence, and corporate bond spreads have narrowed moreover, the functioning of the leveraged loan market is showing some tentative signs of improvement. with regard to the impact of the market correction on bank profits, the write - downs disclosed by