, than in continental europe, where relationship lending is thought to be prevalent. it may also imply that the role of banks in the transmission of monetary policy differs in continental europe and in the us or the uk. in continental europe, banks would insulate the firms from the effects of changes in the market interest rates to a larger extent than us or uk banks would, because of the larger proportion of loans granted through relationship lending. but, as i will argue, current trends in bank structure and competition seem to be putting pressure on banks to limit the scale of their relationship lending activities. 2. what then are the main characteristics and trends of the european banking sector? let me briefly touch upon some aspects that have been addressed in the papers by dermine and by rajan and zingales. these papers stress that competition, both among banks and from other financial intermediaries, has led to the consolidation of the european banking sector and to a diversification of the financial services proposed by banks. first, there has been significant consolidation of the banking sector, including a sharp fall in the number of banks. overall, the number of banks in the euro area decreased by about a third in the last fifteen years. second, financing through issuance of market instruments, which has historically played a minor role for euro area corporations, has become more important since the start of stage three of economic and monetary union. due to the monetary union, large issuers can more easily go abroad if their domestic financial markets are not sufficiently developed. and european banks have been confronted with competition from non - european investment banks in the issuance - underwriting business. third, traditional deposit - taking activities have been challenged by the emergence of assets management companies and mutual and pension funds. these bank competitors have boomed in the last decades, accentuating the competitive pressure on the traditional banking business. fourth, retail lending, and especially lending to smes, remained untouched from the competition of either other financial intermediaries or foreign banks. however, given the over - capacity of most domestic banking sectors of euro area, retail lending is likely to undergo intensified competition among domestic banks. like any business that is confronted with new competitors, banks reassess their activities. for instance, we observe in most countries that banks have been able to generate income by entering into the business of their competitors. banks actually have offered mutual funds and other portfolio management services to the customer network acquired via their traditional deposit taking and lending activities. now, many economists have asked whether

relationship lending can remain profitable in a more competitive environment. 3. increased competition in banking seems to be reducing the availability of relationship lending in the euro area before further describing the effects of increased competition on the availability of relationship lending, let me stress that the phenomena we are talking about are not directly observable, and hence making it hard to evaluate the availability of relationship lending with certainty. on the one hand, increased competition may deter banks from costly acquisition of information on borrowers if they fear that the latter can more easily switch to other banks in good times. on the other hand, the competition from non - banks in so many of banks'activities may push more banks towards relationship lending with sme, a segment on which they can not be challenged by non - banks. recent evidence seems to suggest that the availability of relationship lending is decreasing. we observe for instance that in belgium and germany, the growth rate of real loans to the private sector is lower than output growth, which is quite different from what was observed in previous episodes of economic slowdown. this decline coincides with large commercial banks reducing the scale of their retail banking because competition from local savings banks has intensified. there is also evidence that the banks which have been involved in mergers tend to limit the scale of their lending relationship activities. finally, some observers expect that the introduction of the basel ii accord would increase the capital charges on loans supplied to small and medium enterprises. this new regulation is likely to make the price of credit to small and medium enterprises more responsive to market interest rates. this would directly affect the role of banks in the monetary policy transmission ; as the recent research in the eurosystem has shown this role depends on the particular environment in which european banks have operated up to the recent past. in conclusion, recent trends in the european financial markets seem to have put pressure on banks, leading some of them to reduce the scale of their relationship lending activities. if it continues, the recent reduction in the availability of relationship lending in europe could affect the euro area business cycle and the transmission of monetary policy as the liquidity insurance provided by banks to sme decreases. all in all increased competition will trigger substantial changes and cause difficulties. but in the end after a period of transition the financial industry of the euro area will have gained competitiveness and strengthened robustness. such developments are clearly of primary importance for central bankers and this is precisely why this conference is so useful.