morning's session is all about the status quo for banks – the smaller institutions and the big ones. big or small – they all find themselves operating in a fundamentally altered environment. one that is characterised by the reversal of interest rates and by economic prospects that are not just gloomy but exceptionally uncertain as well. i'd like to begin by briefly outlining those prospects. you will notice that the theme of uncertainty is a leitmotif running throughout my remarks. 2 economic activity and inflation 1 / 4 bis - central bankers'speeches germany's economy was still in good shape going into the summer. economic output was almost back at its pre - pandemic level in the second quarter. and in the third quarter, too, pandemic - related re - opening effects were probably still shoring up economic activity. however, high inflation and uncertainty surrounding the energy supply and the costs thereof dragged increasingly on the german economy. retail trade suffered real declines. activity in the construction sector slowed down. in view of the high gas prices, efforts were made to save gas, particularly in industry. in some sectors, production was cut back and, in part, relocated. despite these headwinds, gross domestic product still posted a slight increase in the third quarter, climbing by 0. 3 % on the quarter according to the federal statistical office's flash estimate. however, sentiment deteriorated sharply as the third quarter progressed : at enterprises across all sectors and among consumers. indeed, the consumer climate index fell to a new record low. the gas supply situation is currently better than expected – gas storage facilities are well filled, i'm pleased to say. at present, our bundesbank experts are leaning towards not expecting outright rationing in germany this winter. it could still be a close call, though, depending on how the weather and consumption patterns play out. incentives to save gas are therefore still as important as ever. high energy costs may, however, cause output to decline further, particularly in industry. the recent downbeat production plans and export expectations in industry are consistent with that view. moreover, the considerable losses in purchasing power and households'subdued mood for spending are likely to lead to a drop in private consumption. service providers whose businesses are heavily dependent on private consumption will probably bear the brunt of this. economic output could fall significantly overall in the final quarter of 2022 and first quarter of 2023. this would mean we would be faced with a recession, i. e. a

my view there are also merits in facilitating the carve - out of substantial portions of bank balance sheets. but this assumes, of course, that workable solutions exist for the transfer of legacy assets at sensible prices to investors able and willing to manage them. it also assumes decisive action to kick - start the market for loans in those jurisdictions where npl ratios are the highest – that is, in cyprus and in greece. second, banks with perceived business model risks need to do more to mitigate uncertainty by reshaping their business mix and their operational models. asset carve - outs could be catalytic here as well : streamlining their balance sheets by disposing of assets can allow banks to concentrate on developing new business, as opposed to managing legacy assets – in other words, it can save them from “ zombification ”. beyond that, banks with weak profitability need to find ways to increase non - interest income and, where possible, to reduce further their operating costs. there appears to be scope for this too. 4 on the earnings side, for example, we have already observed a trend among banks to compensate for lower interest income by increasing fees and commissions. there is some evidence that banks are offering fee - based products to clients as substitutes for interestbased products. on the cost side savings are more challenging given the extensive rationalisation efforts of recent years, but there is still one obvious “ low hanging fruit ” to be picked : consolidation within the sector. indicators of market concentration suggest some over - capacity in the european banking sector, especially in countries with more fragmented banking systems. for example, the herfindahl - hirschman index for the euro area, though rising in recent years, still stands below 750. as a general rule, a figure below 1000 signals low concentration. 5 cost - income ratios in some banking sectors also remain high. that implies there would be efficiency gains from consolidation without exacerbating “ too - big - to - fail ” problems. the fact that we now have a european supervisory and resolution regime presents the ideal conditions for banks to capitalise on new cross - border m & a opportunities. what our economy needs is european banks operating in a european market : large enough to operate across borders and diversify risks, but small enough to be resolved with the resources of the single resolution fund. this would reap the full benefits of banking union and improve the terms of the trade - off between financial stability and economic efficiency. 6 for that to happen