, on a more positive note, there are signs that the past sharp falls in house prices, together with low interest rates, have improved housing affordability. this appears to explain, at least in part, the recent turnaround in the extension of new loans to households for house purchases, shown in the chart 4 on slide 8, although substantial differences in these patterns remain across member states. iii. main risks identified within the euro area financial system let me now turn to the three main risks that we have identified within the euro area financial system. the first is the possibility of a setback to the recent recovery of bank profitability. after the sizeable net losses, which were endured by around half of the euro area large and complex banking groups ( lcbgs ) in late 2008, many of them returned to modest profitability during 2009. moreover, as shown in the left - side of chart 5 on slide 10, banks ’ financial performances strengthened further in the first quarter of 2010 and all lcbgs which have reported financial results so far have shown a positive return on equity. the same pattern can be seen as regards the return on assets. the leverage ratios of lcbgs have remained broadly constant after a sharp decline in the first quarter of 2009. these relatively stable ratios, however, conceal some differences in the ways individual institutions have lowered their leverage ratios. most of them have increased their tier 1 capital, while many have also reduced their assets. overall, the shock - absorbing capacities of euro area lcbgs improved substantially during 2009 and in the first quarter of 2010. even those institutions with the lowest capital ratios managed to enhance their buffers to levels well in excess of minimum regulatory requirements. at the same time, the capital buffers in some segments of the euro area banking sector may not have improved as quickly as has been the case for the lcbgs and will require further strengthening. conditions in euro area lcbg funding markets have also tended to improve for much of the past six months, although the recent rise in sovereign credit risks has led to a setback for longerterm debt financing costs. as shown in the right - side of chart 5, the most important driver of euro area lcbgs ’ net income throughout 2009 and in the first quarter of 2010 continued to be net interest income. by the first quarter of this year, around two - thirds of the total net income of the lcbgs was generated from this source, while, before the crisis, around half of

sabine lautenschlager : basel iii – sense and sensitivity speech by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the european central bank, at the institute for law and finance conference on basel iii, frankfurt am main, 29 january 2018. * * * it is done : basel iii has been finalised. i admit that it was a long journey, but in my view, it was worth the wait : basel iii will help to make banking safer. it is crucial, though, that basel iii is properly implemented – in europe and around the world. it must not be watered down. basel iii marks the end of the post - crisis reforms ; regulatory certainty has been restored. the banks know what awaits them ; they can be confident about the regulatory framework, and can plan ahead and support the real economy. but does basel iii deliver what was promised? does it, on the one hand, create rules which are sufficiently risk - sensitive to set the right incentives for banks? and does it, on the other hand, create rules which are simple enough to decrease model risk? banks are not enchanted by basel iii. many of them claim that it throws risk sensitivity overboard and penalises low risk exposures. are these claims justified? well, we have not thrown risk sensitivity overboard. and why would we? risk sensitivity helps align capital requirements with actual levels of risk and supports an efficient capital allocation. it prevents arbitrage and risk shifting. and risk - sensitive rules promote sound risk management. but we all know how challenging it is to measure and model risks. much depends on the quality of the models ; much depends on the data and the assumptions that feed into those models ; and much depends on supervisors ’ capacity to act. if there are errors along the way, banks might end up undercapitalised and vulnerable. this, in turn, might lead markets to question the reliability of risk - based capital requirements in general, which would undermine trust in banks more generally. therefore we need to balance risk sensitivity with some safeguards. and this is exactly what we aim to do with basel iii. it preserves risk sensitivity. it retains internal models for most asset classes. and it enhances the risk sensitivity of the standardised approaches. but at the same time, basel iii adds a few safeguards. first, i think we can all agree that it makes no sense to allow for more complex risk -