last crisis. in addition, 18 / 29 there is evidence that the lower the level of synchrony between the economic and financial cycles of the countries in which banks operate, the greater these benefits. 5 in this respect a profound reflection at the european and the international level on the regulatory treatment of diversification in the banking business may be appropriate, so that, in conjunction with the greater complexity it may entail, some of its beneficial effects on banks ’ risk profiles may be afforded better recognition. sixth, nor should we overlook the importance of operational risk being correctly managed by banks. operational risk accounts for 9. 3 % of the risk - weighted assets of spanish deposit institutions by volume, slightly below the european average ( 10. 5 % ). in any event, we know on past experience that the deterioration in solvency associated with an operational risk event can be high. indeed, for european banks affected by the most serious operational events, this deterioration has remained over 1. 25 pp of cet1 in the last five years, rising to 2. 1 pp in 2018. as i mentioned in my introduction, in the case of spain, potential costs associated with legal risks continue to contribute to operational risk at deposit institutions. the processes linked to past litigation, for example over floor clauses, have had an estimated cost for the sector of more than €2. 2 billion up to june 2019. moreover, there are other significant legal processes still pending settlement. in addition, legal risk and certain other factors relating to banks ’ conduct have had a significant impact on the reputation of the banking sector, and not only in spain. in this respect it is important to note that reputation and customer confidence are fundamental to the banking business. in consequence, and also from a purely economic standpoint, given that in the long term litigation costs are far higher than the possible benefits that some banks in 5 see i. argimon ( 2017 ), “ decentralized multinational banks and risk taking : the spanish experience in the crisis ”, banco de espana working paper no. 1749. 19 / 29 may have obtained in the short term as a result of questionable behaviour, banks should strive to reverse this trend, providing their customers with financial products and services suited to their needs and capabilities, and also supplying the key information in a clear and transparent manner. similarly, banks should address the technology risk stemming from the impact of the adoption of new technologies on, for example, the probability of suffering cyberattacks, with extremely high

y v reddy : regulators ’ eyes on financial institutions comments by dr y v reddy, governor of the reserve bank of india, published in january 2007 issue of the banker, london. it can also be accessed at www. thebanker. com. * * * as we move from a world based on relationships to one based on transactions, can our banks be far behind? indeed, banking has been transformed, perhaps unrecognisably, and regulators and customers are taking notice. in the 1970s, a visit to the bank meant face - to - face time, assistance with problems, financial advice, and often just a friendly chat with your banker who you knew and trusted. today, many customers and banks prefer point - and - click transactions, and face time can sometimes mean fees. and whether you are in chennai or chicago, the person answering your bank query is probably in bangalore. what does this mean for the banks, their customers and regulators? banks rely less on customer loyalty and more on efficiency. reputational concerns that were once paramount are less critical – witness the million - dollar penalties routinely imposed on some of the global banking giants ; yet, they continue to grow. efficiency rules fee - based income has overtaken net interest margin income. customers enjoy efficient transactions, but find themselves unequipped to make the best possible financial decisions with regard to their banking needs. it is perhaps significant that bank regulators, who were until recently content with bank licensing and applying prudential regulations while encouraging competition, are now focusing on preparing customers to deal with the banks. today, some banks levy a penalty or an interest charge for not maintaining a minimum balance, for not operating a bank account for a certain period, and for other negligent behaviour – although the interest charges paid by the bank for similar negligent behaviour are less than those paid by the depositor. these treatments are often sanctified by the terms and conditions imposed when an account holder opens an account. but in signing the contract, customers are not as empowered or as cautious as they should be. this could be due to several reasons, among them the prevalence of nonstandard contracts that make comparison of competing products difficult and tend to dampen competition. educating consumers in response to overcharging on credit cards and other issues, bank regulators are taking initiatives to prepare customers for the market by educating them ( through financial education initiatives ), counselling them ( through credit counselling ), and assuring them ( of "