change is very likely to affect the financial system as well, namely : - economic and financial relationships - the financial structure and - the effectiveness of monetary policy. 3. impact of demographic changes on the financial system 3. 1 ageing and financial returns let me start with the impact of ageing on financial returns – or, to be more precise, with its impact on real interest rates. real interest rates are one of the most prominent indicators used by central bankers, as they reflect investors ’ expectations about economic activity. all other things equal, theoretical and empirical studies alike suggest a decrease in real interest rates due to a higher capital - labour ratio. this effect would be amplified by a shift from pay - as - you - go to funded pension systems – which would be equivalent to an increase in private savings – and also by an allocation of funds to bonds. to what extent the real interest rate is likely to decline is, however, the subject of heated debated. in my view, only a slight decrease is to be expected. first of all, integrated financial markets and internationally mobile capital should open up new ways of capital utilisation. secondly, the worst - case scenario of an asset meltdown ( ie the assumption that the retiring baby - boomer generation will start dissaving, thus putting immense downward pressure on asset prices ) is unlikely to occur : not only economic policy committee and european commission, the impact of ageing on public expenditure, european economy special report 1 / 2006. if projections for education expenditures and unemployment benefits are excluded, the increase in ageing - induced spending amounts to 4. 6 % of euro - area gdp, ranging from 0. 4 % to over 10 % of gdp for individual countries. does a longer life expectancy imply higher individual saving rates of workers, but retirees are also not expected to dissave – as would be assumed by the underlying life - cycle model. 3 3. 2 ageing and financial structure apart from financial returns, ageing also impacts on financial systems. the large capital inflows into pension funds and other institutionalised forms of saving since the 1990s have been the driving factor behind this development. 4 they reflect the noticeable increase in saving for retirement by the babyboomer generation as well as the partial transition from pay - as - you - go to funded pension schemes. in sum, these large capital inflows should accelerate the shift in eu financial systems from a bank basis to a capital - market basis. in general, the transition

to countries ’ particular circumstances. in some, the financial authorities might decide the scale of the haircuts / conversions ; perhaps in other countries, it might be thought that a senior judge should decide on the basis of an application by the financial authorities. it is also worth saying that maintaining an lcfi in business through such means would neither preclude nor of itself require regulatory action against management or, once the crisis had passed, to wind - down parts or all of the business over time. nor would a regime of the broad kind i have sketched exclude restructuring banking groups into functional subsidiaries, with different resolution tools applied to, say, deposittaking / payments ; custody and global cash management ; the business of illiquid lending to small and medium - sized enterprises and households ; trading / derivatives business or wholesale banking more generally. that would not be inconsistent with reducing the number of legal entities in lcfi groups, perhaps by an order of magnitude. the current fsbsponsored work to develop “ recovery and resolution plans ” for the top 25 or so lcfis is designed to identify where those kind of steps are warranted. resolution could, therefore, take its place alongside structure and regulation as one of the key elements of a reform package to strengthen the global financial system. a super - special resolution regime along those lines would, on the face of it, go quite a long way towards reintroducing market discipline – by putting uninsured creditors at risk even in systemic situations. i am not innocent enough in the ways of the market to think that it wouldn ’ t affect behaviour. of course, it would lead to changes, over time, in the capital structure of investment banking operations. proper transitional periods would be needed. i suggest that it is worth debating. maybe there is a fatal flaw. we should certainly search for the flaws. but if we do not find a way of resolving massive and complex trading books, the regulation of the business would probably have to be fiercer than otherwise in order to crush the probability of failure. resolution is a way of coping with failure. key voices are the nonbank financial sector and the corporate treasurers who finance the banking system. what would they get out of it? they might benefit from avoiding the risk that the authorities choose to liquidate a lcfi they had thought was too big to fail, with the depletion of value that entails ; think of lehman. they would, in effect, be trading off losses in one