indeed, estimates of the cost of capital for european banks show that it has declined significantly since the beginning of the year, although it remains higher than the average in countries, like italy and spain, that have been hit particularly hard by the financial crisis. this is a key issue that deserves further analysis and that we have to keep monitoring closely. a contribution to closing the gap must also come from banks ’ efforts to increase profitability in a structural way. this is something that concerns most banks, those facing difficulties as well as those that currently show healthy conditions. against this backdrop, while there is no single winning business model, the experience of the most profitable banks provides useful guidance for both costs and revenues. on the revenue side, a greater diversification of the sources of income in favour of high quality financial services can help compensate for the prolonged compression of interest margins. a progress in this direction is already visible, but international comparisons suggest that there is ample room for improvement. the expansion of non - bank financing and technology - based intermediation, despite increasing competition, also offers banks opportunities for broadening their revenues by focusing on the provision of related and complementary services, for example in the areas of corporate finance and asset management. benefits for income generation can also come from mergers and acquisitions geared towards exploiting economies of scope and scale, and facilitating investment and access to capital markets. those of a cross - border nature can also foster financial integration. on the cost side, there is a broad consensus that operational efficiency needs to be improved resolutely. since the beginning of the crisis, the banks ’ cost - to - income ratio has deteriorated in the majority of countries. in many cases this has reflected the reduction in revenues per unit of assets, while the cost - to - asset ratio has often improved. in spain there has been a major effort in streamlining branch networks ; the number of branches has dropped by almost 40 per cent since 2008. in italy the figure is less impressive, 15 per cent, but progress has been made nonetheless. as in other countries, there is room for further streamlining – not only as regards branch networks but also operational costs, including, where appropriate, labour costs and managers ’ remunerations. cost savings coming from further rationalisation can be used to redirect spending towards investment in technology and innovation, which can go a long way to enhancing productivity. needless to say, further progress in the clean - up of balance sheets is also necessary to increase profitability

between 2008 and 2016 the number of euro area banks declined by around 25 per cent, with spain being one of the countries where the reduction was greatest. the number of branches is also decreasing and the use of resources is generally becoming more efficient. overall, this set of structural changes is delivering positive results. the european banking system is enhancing its resilience and all actors involved are contributing : regulators, banks, and supervisors. there is, however, no room for complacency. as i will discuss next, legacies from the crisis still linger and remaining vulnerabilities call for continued vigilance and unwavering determination on all sides. out of the woods? not yet : some crisis legacies are still with us the issue that epitomises the problems left on the table is low profitability. on the aggregate, the return on equity of euro area banks has not yet recovered since the financial and sovereign crises, and remains low by historical and international standards. there are, however, important heterogeneities : small and medium - sized banks are still suffering, while larger intermediaries are recovering. in 2017, net interest income improved for some intermediaries, while fee income, supported by the asset management business, increased more broadly. profitability is also well below estimates of the cost of equity for most banks. despite the differences across banks and jurisdictions – in spain, for example, the gap is relatively smaller than elsewhere – the problem extends across europe. the causes of the phenomenon can be traced back to both transitory factors – such as the legacy assets from the adverse cyclical developments – and structural elements, including the need to adjust the business model to technological change and to the new regulatory environment. the ongoing recovery of the global and the euro area economies contributes to addressing the transitory impediments. however, analyses and simulations from various sources seem to suggest that for a non - negligible part of the european banking sector this may not suffice to recover adequate levels of profitability. going forward, the target for banks ’ profitability may actually prove to be lower than the one deemed appropriate by some international institutions, such as the imf. indeed, once the transition to the new regulatory regime is completed, and a safer banking system has emerged from the reforms, investors might reduce the returns that they expect to receive from banks. in other words, in future months the “ reform dividend ” may translate into a lower cost of equity.