conditions, it is not yet sufficient to compensate for the low interest rate margins. the continued economic recovery should, however, reduce the negative impact of cyclical factors over time, as banks ’ balance sheets adjust. but most importantly, a number of structural challenges continue to dampen bank profitability. these factors vary across countries and banks and include incomplete business model adjustments, cost inefficiencies and excess capacity. the stock of npls also remains high at some banks. let me elaborate on each of these issues in turn. starting with the issue of business model adjustment, our analysis shows that, in the past, diversified banks have been more successful in generating higher revenues from net fees and commissions and trading when faced with pressure on interest income. this is perhaps no surprise, as banks engaging in custodian, asset management or investment banking activities are likely to be better able to gear themselves towards fee - generating activities, whereas commercial banks may not have access to such opportunities for diversification. 1 at the same time, one has to acknowledge that it is not only the low yield environment and lack of income diversification that is challenging banks ’ business models. the rapid pace of technological advances and the ensuing change in the competitive landscape are both a key strategic opportunity and a challenge for banks. for example, a shift from branch networks towards digital banking has enabled many banks, notably in the nordic countries, to reduce costs while maintaining sound customer bases and market shares. but clearly, a successful transformation is likely to hinge on the support of beneficial structural factors such as labour laws, how the market is structured and the digital readiness of the economy. policy action may thus have a role in supporting these conditions. incumbent banks also need to be prepared for the increasing competition from the non - bank financial sector and “ fintech ”, fuelled by the increasing role of technology in financial services. increased competition in lending, investments and payments is bound to increase pressure on retail banking revenues. it will subject deposits to more intense price competition, and may erode revenues related to overdrafts and payments. adjustments to business models are closely linked to the second challenge : the need to improve cost efficiency. i already mentioned that digitalisation can enable substantial cost savings. however, on aggregate, euro area banks have so far been unable to meaningfully reduce operating costs in the aftermath of the financial crisis. in fact, euro area significant institutions ’ operating expenses have increased by over 5 %, on aggregate, since 2010, despite a

in this way, the banking union and the capital markets union are not mutually exclusive projects ; they are, in fact, mutually reinforcing and can bring the single market for financial services to the next level. this is particularly important in the light of the united kingdom ’ s departure from the eu and the importance of london as a centre for capital market services. the synergies between the banking union and the capital markets union can be looked at from two angles. on the one hand, the banking union supports the capital markets union by increasing the resilience of banks, which in turn supports the development of capital markets. on the other hand, the synergies also run in the opposite direction, as the capital markets union supports the banking union. more integrated and jointly regulated capital markets would support cross - border activities and the resilience of banks. let me be more specific. in an integrated capital market, banks would no longer need to develop local expertise for each national market. they could exploit economies of scale more easily by offering similar or even 5 / 7 bis central bankers'speeches the same products and services in several countries. by operating in a larger, more integrated market, they would likely increase their cross - border holdings of assets and be able to build larger and more diversified collateral pools for securitised products and covered bonds. cross - border assets would contribute to reducing the sovereign - bank nexus. and banks could also benefit from a larger investor base for funding. conclusion let me conclude. although we can see that the resilience of the euro area banking sector has improved considerably since the financial crisis, the lingering structural challenges and the financial stability outlook mean there is no room for complacency. it is important to tackle the remaining structural issues that are preventing the financial union from reaching its full potential. first, banks need to adjust their business models to further diversify their income and reduce cost inefficiencies. they should also prepare for the challenges of digitalisation and competition from technology companies. and it is of the utmost importance that the large stocks of npls that still remain in some banks are reduced. and second, policymakers need to maintain the momentum towards completing the financial union. undue regulatory obstacles to cross - border banking sector consolidation need to be removed. banking union needs to be completed with a backstop for the srf and a credible edis. finally, we need to complete the capital markets union and take advantage of the synergies between