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https://www.bis.org/review/r241211e.htm
|
Denis Beau: Mastering AI in the financial sector - let us collectively rise the challenge!
|
Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Paris financial centre event devoted to artificial intelligence, Paris, 11 December 2024.
|
2024-12-11 00:00:00
|
Denis Beau: Mastering AI in the financial sector - let us collectively
rise the challenge!
Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Paris
financial centre event devoted to artificial intelligence , Paris, 11 December 2024.
* * *
Ladies and gentlemen,
First of all, I would like to thank the organisers for their invitation to this Paris financial
centre event devoted to artificial intelligence (AI): it gives me the opportunity to continue
the dialogue that we at the Banque de France and the ACPR have been conducting
with financial players on this important matter for the industry.
I'll be brief on the observation: AI is one of the most powerful forces driving the
current transformation of the financial sector. Its adoption has accelerated with the
advent of generative AI , which has made the opportunities in terms of productivity,
customer interaction, compliance management, etc. more accessible - and visible to all.
As supervisors, but also as users of these new technologies, every day we can see the
speed and potential of this phenomenon.
Naturally, these technologies can give rise to many risks, for all financial system
participants as well as for the stability of the system as a whole. It is essential that they
are properly managed: the following round-table discussion will shed light on these risks
and the operational challenges they present. I'll mention just one of them now, but not
the least important: In my view, it is a good illustration of the complex issues
cyber risk.
we are facing. AI amplifies cyber risks, not least because it is used by attackers to
increase their effectiveness; AI also has its own specific vulnerabilities (such as the risk
of data poisoning). Conversely, AI can provide the antidote, and improve IT security
management, for example, by helping to detect suspicious behaviour or new threats.
Greater cooperation is needed in this area between data scientists and cyber-
in order to unlock the full potential of AI for cybersecurity.
security specialists,
I would now like to turn to the regulatory and supervisory aspects that a supervisor
naturally thinks of when discussing the opportunities and risks of AI. The European
Union has been a pioneer in this field, with the AI Act. This will mainly concern the
financial sector for two use cases: creditworthiness assessment for granting credit to
individuals, and risk assessment and pricing in health and life insurance. The ACPR
should be responsible for enforcing this regulation, as market surveillance authority.
This new regulation, and more broadly the issues associated with AI, are raising
legitimate questions from the financial sector: to what extent will the new requirements
affect the players? Isn't there a risk of stifling innovation for the sake of mitigating risk?
Without providing a blanket answer to these questions, I would like to put the debate
into perspective as far as the financial sector is concerned, with two simple
messages: i) there is no cause for alarm, as the risks linked to AI can essentially be
dealt with within the framework of existing risk management systems; ii) however, we
should not underestimate certain new technical challenges associated with AI.
As far as risk management in the financial sector is concerned, the AI Act will not
bring about a Copernican revolution.
Financial institutions have a sound risk management culture, as well as robust
governance and internal control systems. Very recently, the DORA regulation
supplemented the traditional regulatory framework with specific rules on operational
resilience and IT risk management. The
financial sector is therefore well equipped
to meet the challenge of complying with the new regulations.
Admittedly, the objectives of the AI Act, namely the protection of fundamental rights,
and those of prudential regulation - financial stability and the ability to meet customer
commitments differ. But, operationally, when the AI Act requires "high-risk systems"
to have a risk management process, data governance, traceability and auditability, and
measures to guarantee robustness, accuracy and cyber-security throughout the
lifecycle, are we really in uncharted waters? I don't think so.
On the contrary, I believe that the principles of sound risk management and
governance in force in the financial sector remain valid for the AI Act. They will
therefore be the ACPR's yardstick for assessing the compliance of systems when it is
called upon to exercise its role of market surveillance authority. More specifically, our
approach to this new mission can be summed up in a few principles: (i) the
implementation of 'market surveillance' in the regulatory sense, i.e. primarily aimed at
identifying systems likely to pose compliance problems; (ii) a risk-based approach to
ensure that the means implemented are proportionate to the intended outcomes; and
(iii) making full use of synergies with prudential supervision. I believe that this was
the intention of the European legislator, when it entrusted national financial supervisors
with the role of "market surveillance authorities". It's also the best way of ensuring that
we don't make the regulations any more complex, at a time when our common objective
should be to simplify them.
Naturally, the principles of good governance and internal control also apply to the
algorithms that would not be considered high-risk by the AI Act, if they pose risks,
for example of a prudential nature, to the organisations concerned: in this area, the
experience acquired from the implementation of the AI Act and the resulting best
practices will be invaluable for both supervisors and supervised entities.
I repeat, risk management culture is an asset. However,
the challenges posed by the
use of artificial intelligence should not be underestimated.
Some of the challenges raised by this technology are entirely new. Let me give you two
examples.
Firstly, explainability: with each advance in this field, artificial intelligence algorithms
have become increasingly opaque, to the extent that it is often difficult, if not impossible,
to understand and explain certain results proposed by the machine or to identify their
sources, even if some tools are striving to combat this shortcoming. In a regulated
sector such as the financial sector, this question is naturally crucial, and needs to be
addressed at every level: of AI tools need to have a sufficient
day-to-day users
understanding of how they work and of their limitations if they are to make appropriate
use of them and avoid the two pitfalls of either blindly trusting the machine or of
systematically mistrusting it. The supervisorsthat monitor the operation of AI systems
and, above all, the auditors who review them, need more advanced technical and
functional explanations to assess their performance, reliability and compliance. Not
forgetting the final customer who, if in direct contact with an AI algorithm, is entitled to
explanations for the rationale behind the decision taken or the commercial proposal
made to them.
The second example is fairness. Back in 2016, the chatbot Tay, which became 'racist'
in the space of a few hours, made us all aware of this issue; the biases identified more
recently in consumer tools such as ChatGPT are a reminder that artificial intelligence is
particularly sensitive to the biases present in data, and is likely to reinforce them.
Indeed, one of the aims of the AI Act is to detect and prevent these biases before they
cause harm to citizens. This is a technically complex issue, as banning the use of
certain protected variables is not enough to guarantee that algorithms are harmless.
This is particularly true for activities such as granting credit or pricing insurance, where
customer segmentation is part of normal business and risk management
practices in a competitive environment.
Speakers at the following round tables will no doubt explain how they are tackling these
challenges in practical terms. I would simply like to share one conviction. One of the
challenges, if not the main challenge, is to get specialists from very different
backgrounds to talk together and understand each other: data scientists, legal
experts, specialists in human-machine interaction, auditors, etc. I mentioned
earlier the need for cooperation between data science and cybersecurity: as you can
see, the circle of cooperation that needs to be put in place is actually much wider!
To address these new aspects, and to provide proof that the various regulatory
requirements are being met, financial institutions will need to enhance their skills
by acquiring new human and technical capabilities. As market surveillance authority
and prudential supervisor, the ACPR will ensure that risks are effectively managed.
Compliance with the AI Act is naturally more than just an administrative process of
internal labelling, and the supervisor cannot simply 'tick boxes'. On the contrary, the
supervisor will have to ensure that the algorithms are managed and monitored by
competent people who understand their inner workings.
This means, of course, that the financial supervisor itself has to acquire new skills and
adapt its tools and methods. We will have to gradually establish a set of rules
regarding new issues such as explainability, a topic on which the ACPR has already
published some proposals in the past, or the fairness of algorithms. We will also need to
develop a specific methodology for auditing AI systems.
We cannot and must not take this methodological step alone: instead, we need to
build
synergies with all the other AI supervisors in France and Europe. AI regulation is
cross-sectoral and the supervisors will not escape the pressing obligation of
cooperating in this area, which involves so much diverse expertise.
Today, I would like to extend this call for cooperation to the whole financial sector.
Articulating the AI Act with sector-specific regulations, clarifying expectations, sharing
best practices, developing audit methodology: supervisors and the supervised share
many challenges, and we will overcome them all the more easily if we are able to
move forward together. The ACPR is now preparing itself for the 2026 deadline: as it
has already done in the past, it will seek input from the entire ecosystem to co-design
practical methods for implementing - and supervising - the AI Act. That is why I am
today calling on volunteer companies in the financial sector to contact the ACPR staff to
take part in our work.
For the stability of the financial sector, we must collectively master the uses of AI;
together, let's rise to this challenge! Thank you for your attention.
|
['denis beau: mastering ai in the financial sector - let us collectively rise the challenge!', 'speech by mr denis beau, first deputy governor of the bank of france, at the paris financial centre event devoted to artificial intelligence , paris, 11 december 2024.', '* * * ladies and gentlemen, first of all, i would like to thank the organisers for their invitation to this paris financial centre event devoted to artificial intelligence (ai): it gives me the opportunity to continue the dialogue that we at the banque de france and the acpr have been conducting with financial players on this important matter for the industry.', "i'll be brief on the observation: ai is one of the most powerful forces driving the current transformation of the financial sector.", 'its adoption has accelerated with the advent of generative ai , which has made the opportunities in terms of productivity, customer interaction, compliance management, etc.', 'more accessible - and visible to all.', 'as supervisors, but also as users of these new technologies, every day we can see the speed and potential of this phenomenon.', 'naturally, these technologies can give rise to many risks, for all financial system participants as well as for the stability of the system as a whole.', 'it is essential that they are properly managed: the following round-table discussion will shed light on these risks and the operational challenges they present.', "i'll mention just one of them now, but not the least important: in my view, it is a good illustration of the complex issues cyber risk.", 'ai amplifies cyber risks, not least because it is used by attackers to increase their effectiveness; ai also has its own specific vulnerabilities (such as the risk of data poisoning).', 'conversely, ai can provide the antidote, and improve it security management, for example, by helping to detect suspicious behaviour or new threats.', 'greater cooperation is needed in this area between data scientists and cyber- in order to unlock the full potential of ai for cybersecurity.', 'security specialists, i would now like to turn to the regulatory and supervisory aspects that a supervisor naturally thinks of when discussing the opportunities and risks of ai.', 'the european union has been a pioneer in this field, with the ai act.', 'this will mainly concern the financial sector for two use cases: creditworthiness assessment for granting credit to individuals, and risk assessment and pricing in health and life insurance.', 'the acpr should be responsible for enforcing this regulation, as market surveillance authority.', 'this new regulation, and more broadly the issues associated with ai, are raising legitimate questions from the financial sector: to what extent will the new requirements affect the players?', "isn't there a risk of stifling innovation for the sake of mitigating risk?", 'without providing a blanket answer to these questions, i would like to put the debate into perspective as far as the financial sector is concerned, with two simple messages: i) there is no cause for alarm, as the risks linked to ai can essentially be dealt with within the framework of existing risk management systems; ii) however, we should not underestimate certain new technical challenges associated with ai.', 'as far as risk management in the financial sector is concerned, the ai act will not bring about a copernican revolution.', 'financial institutions have a sound risk management culture, as well as robust governance and internal control systems.', 'very recently, the dora regulation supplemented the traditional regulatory framework with specific rules on operational resilience and it risk management.', 'the financial sector is therefore well equipped to meet the challenge of complying with the new regulations.', 'admittedly, the objectives of the ai act, namely the protection of fundamental rights, and those of prudential regulation - financial stability and the ability to meet customer commitments differ.', 'but, operationally, when the ai act requires "high-risk systems" to have a risk management process, data governance, traceability and auditability, and measures to guarantee robustness, accuracy and cyber-security throughout the lifecycle, are we really in uncharted waters?', "i don't think so.", 'on the contrary, i believe that the principles of sound risk management and governance in force in the financial sector remain valid for the ai act.', "they will therefore be the acpr's yardstick for assessing the compliance of systems when it is called upon to exercise its role of market surveillance authority.", "more specifically, our approach to this new mission can be summed up in a few principles: (i) the implementation of 'market surveillance' in the regulatory sense, i.e.", 'primarily aimed at identifying systems likely to pose compliance problems; (ii) a risk-based approach to ensure that the means implemented are proportionate to the intended outcomes; and (iii) making full use of synergies with prudential supervision.', 'i believe that this was the intention of the european legislator, when it entrusted national financial supervisors with the role of "market surveillance authorities".', "it's also the best way of ensuring that we don't make the regulations any more complex, at a time when our common objective should be to simplify them.", 'naturally, the principles of good governance and internal control also apply to the algorithms that would not be considered high-risk by the ai act, if they pose risks, for example of a prudential nature, to the organisations concerned: in this area, the experience acquired from the implementation of the ai act and the resulting best practices will be invaluable for both supervisors and supervised entities.', 'i repeat, risk management culture is an asset.', 'however, the challenges posed by the use of artificial intelligence should not be underestimated.', 'some of the challenges raised by this technology are entirely new.', 'let me give you two examples.', 'firstly, explainability: with each advance in this field, artificial intelligence algorithms have become increasingly opaque, to the extent that it is often difficult, if not impossible, to understand and explain certain results proposed by the machine or to identify their sources, even if some tools are striving to combat this shortcoming.', 'in a regulated sector such as the financial sector, this question is naturally crucial, and needs to be addressed at every level: of ai tools need to have a sufficient day-to-day users understanding of how they work and of their limitations if they are to make appropriate use of them and avoid the two pitfalls of either blindly trusting the machine or of systematically mistrusting it.', 'the supervisorsthat monitor the operation of ai systems and, above all, the auditors who review them, need more advanced technical and functional explanations to assess their performance, reliability and compliance.', 'not forgetting the final customer who, if in direct contact with an ai algorithm, is entitled to explanations for the rationale behind the decision taken or the commercial proposal made to them.', 'the second example is fairness.', "back in 2016, the chatbot tay, which became 'racist' in the space of a few hours, made us all aware of this issue; the biases identified more recently in consumer tools such as chatgpt are a reminder that artificial intelligence is particularly sensitive to the biases present in data, and is likely to reinforce them.", 'indeed, one of the aims of the ai act is to detect and prevent these biases before they cause harm to citizens.', 'this is a technically complex issue, as banning the use of certain protected variables is not enough to guarantee that algorithms are harmless.', 'this is particularly true for activities such as granting credit or pricing insurance, where customer segmentation is part of normal business and risk management practices in a competitive environment.', 'speakers at the following round tables will no doubt explain how they are tackling these challenges in practical terms.', 'i would simply like to share one conviction.', 'one of the challenges, if not the main challenge, is to get specialists from very different backgrounds to talk together and understand each other: data scientists, legal experts, specialists in human-machine interaction, auditors, etc.', 'i mentioned earlier the need for cooperation between data science and cybersecurity: as you can see, the circle of cooperation that needs to be put in place is actually much wider!', 'to address these new aspects, and to provide proof that the various regulatory requirements are being met, financial institutions will need to enhance their skills by acquiring new human and technical capabilities.', 'as market surveillance authority and prudential supervisor, the acpr will ensure that risks are effectively managed.', "compliance with the ai act is naturally more than just an administrative process of internal labelling, and the supervisor cannot simply 'tick boxes'.", 'on the contrary, the supervisor will have to ensure that the algorithms are managed and monitored by competent people who understand their inner workings.', 'this means, of course, that the financial supervisor itself has to acquire new skills and adapt its tools and methods.', 'we will have to gradually establish a set of rules regarding new issues such as explainability, a topic on which the acpr has already published some proposals in the past, or the fairness of algorithms.', 'we will also need to develop a specific methodology for auditing ai systems.', 'we cannot and must not take this methodological step alone: instead, we need to build synergies with all the other ai supervisors in france and europe.', 'ai regulation is cross-sectoral and the supervisors will not escape the pressing obligation of cooperating in this area, which involves so much diverse expertise.', 'today, i would like to extend this call for cooperation to the whole financial sector.', 'articulating the ai act with sector-specific regulations, clarifying expectations, sharing best practices, developing audit methodology: supervisors and the supervised share many challenges, and we will overcome them all the more easily if we are able to move forward together.', 'the acpr is now preparing itself for the 2026 deadline: as it has already done in the past, it will seek input from the entire ecosystem to co-design practical methods for implementing - and supervising - the ai act.', 'that is why i am today calling on volunteer companies in the financial sector to contact the acpr staff to take part in our work.', "for the stability of the financial sector, we must collectively master the uses of ai; together, let's rise to this challenge!", 'thank you for your attention.']
|
Denis Beau
|
Banque de France
|
First Deputy Governor
|
France
|
https://www.bis.org/review/r241219c.htm
|
Christine Lagarde: ECB press conference - introductory statement
|
Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 12 December 2024.
|
2024-12-12 00:00:00
|
Christine Lagarde: ECB press conference - introductory statement
Introductory statement by Ms Christine Lagarde, President of the European Central
Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt
am Main, 12 December 2024.
* * *
Good afternoon, the Vice-President and I welcome you to our press conference.
The Governing Council today decided to lower the three key ECB interest rates by 25
basis points. In particular, the decision to lower the deposit facility rate - the rate
through which we steer the monetary policy stance - is based on our updated
assessment of the inflation outlook, the dynamics of underlying inflation and the
strength of monetary policy transmission.
The disinflation process is well on track. Staff see headline inflation averaging 2.4 per
cent in 2024, 2.1 per cent in 2025, 1.9 per cent in 2026 and 2.1 per cent in 2027 when
the expanded EU Emissions Trading System becomes operational. For inflation
excluding energy and food, staff project an average of 2.9 per cent in 2024, 2.3 per cent
in 2025 and 1.9 per cent in both 2026 and 2027.
Most measures of underlying inflation suggest that inflation will settle at around our two
per cent medium-term target on a sustained basis. Domestic inflation has edged down
but remains high, mostly because wages and prices in certain sectors are still adjusting
to the past inflation surge with a substantial delay.
Financing conditions are easing, as our recent interest rate cuts gradually make new
borrowing less expensive for firms and households. But they continue to be tight
because our monetary policy remains restrictive and past interest rate hikes are still
transmitting to the outstanding stock of credit.
Staff now expect a slower economic recovery than in the September projections.
Although growth picked up in the third quarter of this year, survey indicators suggest it
has slowed in the current quarter. Staff see the economy growing by 0.7 per cent in
2024, 1.1 per cent in 2025, 1.4 per cent in 2026 and 1.3 per cent in 2027. The projected
recovery rests mainly on rising real incomes - which should allow households to
consume more - and firms increasing investment. Over time, the gradually fading
effects of restrictive monetary policy should support a pick-up in domestic demand.
We are determined to ensure that inflation stabilises sustainably at our two per cent
medium-term target. We will follow a data-dependent and meeting-by-meeting
approach to determining the appropriate monetary policy stance. In particular, our
interest rate decisions will be based on our assessment of the inflation outlook in light of
the incoming economic and financial data, the dynamics of underlying inflation and the
strength of monetary policy transmission. We are not pre-committing to a particular rate
path.
The decisions taken today are set out in a press release available on our website.
I will now outline in more detail how we see the economy and inflation developing and
will then explain our assessment of financial and monetary conditions.
Economic activity
The economy grew by 0.4 per cent in the third quarter, exceeding expectations. Growth
was driven mainly by an increase in consumption, partly reflecting one-off factors that
boosted tourism over the summer, and by firms building up inventories. But the latest
information suggests it is losing momentum. Surveys indicate that manufacturing is still
contracting and growth in services is slowing. Firms are holding back their investment
spending in the face of weak demand and a highly uncertain outlook. Exports are also
weak, with some European industries finding it challenging to remain competitive.
The labour market remains resilient. Employment grew by 0.2 per cent in the third
quarter, again by more than expected. The unemployment rate remained at its historical
low of 6.3 per cent in October. Meanwhile, demand for labour continues to weaken. The
job vacancy rate declined to 2.5% in the third quarter, 0.8 percentage points below its
peak, and surveys also point to fewer jobs being created in the current quarter.
The economy should strengthen over time, although more slowly than previously
expected. The rise in real wages should strengthen household spending. More
affordable credit should boost consumption and investment. Provided trade tensions do
not escalate, exports should support the recovery as global demand rises.
Fiscal and structural policies should make the economy more productive, competitive
and resilient. It is crucial to swiftly follow up, with concrete and ambitious structural
policies, on Mario Draghi's proposals for enhancing European competitiveness and
Enrico Letta's proposals for empowering the Single Market. We welcome the European
Commission's assessment of governments' medium-term plans for fiscal and structural
policies, as part of the EU's revised economic governance framework. Governments
should now focus on implementing their commitments under this framework fully and
without delay. This will help bring down budget deficits and debt ratios on a sustained
basis, while prioritising growth-enhancing reforms and investment.
Inflation
Annual inflation increased to 2.3 per cent in November according to Eurostat's flash
estimate, from 2.0 per cent in October. The increase was expected and primarily
reflected an energy-related upward base effect. Food price inflation edged down to 2.8
per cent and services inflation to 3.9 per cent. Goods inflation went up to 0.7 per cent.
Domestic inflation, which closely tracks services inflation, again eased somewhat in
October. But at 4.2%, it remains high. This reflects strong wage pressures and the fact
that some services prices are still adjusting with a delay to the past inflation surge. That
said, underlying inflation is overall developing in line with a sustained return of inflation
to target.
The increase in compensation per employee moderated to 4.4 per cent in the third
quarter from 4.7 per cent in the second. Amid stable productivity, this contributed to
slower growth in unit labour costs. Staff expect labour costs to increase more slowly
over the projection horizon as a result of lower wage growth and higher productivity
growth. Moreover, profits should continue to partially offset the effects of higher labour
costs on prices, especially in the near term.
We expect inflation to fluctuate around its current level in the near term, as previous
sharp falls in energy prices continue to drop out of the annual rates. It should then settle
sustainably at around the two per cent medium-term target. Easing labour cost
pressures and the continuing impact of our past monetary policy tightening on
consumer prices should help this process. Most measures of longer-term inflation
expectations stand at around 2 per cent, and market-based indicators of medium to
longer-term inflation compensation have decreased measurably since the Governing
Council's October meeting.
Risk assessment
The risks to economic growth remain tilted to the downside. The risk of greater friction
in global trade could weigh on euro area growth by dampening exports and weakening
the global economy. Lower confidence could prevent consumption and investment from
recovering as fast as expected. This could be amplified by geopolitical risks, such as
Russia's unjustified war against Ukraine and the tragic conflict in the Middle East, which
could disrupt energy supplies and global trade. Growth could also be lower if the lagged
effects of monetary policy tightening last longer than expected. It could be higher if
easier financing conditions and falling inflation allow domestic consumption and
investment to rebound faster.
Inflation could turn out higher if wages or profits increase by more than expected.
Upside risks to inflation also stem from the heightened geopolitical tensions, which
could push energy prices and freight costs higher in the near term and disrupt global
trade. Moreover, extreme weather events, and the unfolding climate crisis more
broadly, could drive up food prices by more than expected. By contrast, inflation may
surprise on the downside if low confidence and concerns about geopolitical events
prevent consumption and investment from recovering as fast as expected, if monetary
policy dampens demand more than expected, or if the economic environment in the rest
of the world worsens unexpectedly. Greater friction in global trade would make the euro
area inflation outlook more uncertain.
Financial and monetary conditions
Market interest rates in the euro area have declined further since our October meeting,
reflecting the perceived worsening of the economic outlook. Although financing
conditions remain restrictive, our interest rate cuts are gradually making it less
expensive for firms and households to borrow.
The average interest rate on new loans to firms was 4.7 per cent in October, more than
half a percentage point below its peak a year earlier. The cost of issuing market-based
debt has fallen by more than a percentage point since its peak. The average rate on
new mortgages, at 3.6 per cent in October, is about half a percentage point lower than
at its highest point in 2023, even though the average rate on the outstanding stock of
mortgages is still set to rise.
Bank lending to firms has gradually picked up from low levels, and increased by 1.2 per
cent in October compared with a year earlier. Debt securities issued by firms were up
3.1% in annual terms, which was similar to the increase in the previous few months.
Mortgage lending continued to rise gradually in October, with an annual growth rate of
0.8 per cent.
In line with our monetary policy strategy, the Governing Council thoroughly assessed
the links between monetary policy and financial stability. Euro area banks remain
resilient and there are few signs of financial market stress. Financial stability risks
nonetheless remain elevated. Macroprudential policy remains the first line of defence
against the build-up of financial vulnerabilities, enhancing resilience and preserving
macroprudential space.
Conclusion
The Governing Council today decided to lower the three key ECB interest rates by 25
basis points. In particular, the decision to lower the deposit facility rate - the rate
through which we steer the monetary policy stance - is based on our updated
assessment of the inflation outlook, the dynamics of underlying inflation and the
strength of monetary policy transmission. We are determined to ensure that inflation
stabilises sustainably at our two per cent medium-term target. We will follow a
datadependent and meeting-by-meeting approach to determining the appropriate monetary
policy stance. In particular, our interest rate decisions will be based on our assessment
of the inflation outlook in light of the incoming economic and financial data, the
dynamics of underlying inflation and the strength of monetary policy transmission. We
are not pre-committing to a particular rate path.
In any case, we stand ready to adjust all of our instruments within our mandate to
ensure that inflation stabilises sustainably at our medium-term target and to preserve
the smooth functioning of monetary policy transmission.
We are now ready to take your questions.
|
['christine lagarde: ecb press conference - introductory statement introductory statement by ms christine lagarde, president of the european central bank, and mr luis de guindos, vice-president of the european central bank, frankfurt am main, 12 december 2024.', '* * * good afternoon, the vice-president and i welcome you to our press conference.', 'the governing council today decided to lower the three key ecb interest rates by 25 basis points.', 'in particular, the decision to lower the deposit facility rate - the rate through which we steer the monetary policy stance - is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.', 'the disinflation process is well on track.', 'staff see headline inflation averaging 2.4 per cent in 2024, 2.1 per cent in 2025, 1.9 per cent in 2026 and 2.1 per cent in 2027 when the expanded eu emissions trading system becomes operational.', 'for inflation excluding energy and food, staff project an average of 2.9 per cent in 2024, 2.3 per cent in 2025 and 1.9 per cent in both 2026 and 2027. most measures of underlying inflation suggest that inflation will settle at around our two per cent medium-term target on a sustained basis.', 'domestic inflation has edged down but remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay.', 'financing conditions are easing, as our recent interest rate cuts gradually make new borrowing less expensive for firms and households.', 'but they continue to be tight because our monetary policy remains restrictive and past interest rate hikes are still transmitting to the outstanding stock of credit.', 'staff now expect a slower economic recovery than in the september projections.', 'although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter.', 'staff see the economy growing by 0.7 per cent in 2024, 1.1 per cent in 2025, 1.4 per cent in 2026 and 1.3 per cent in 2027. the projected recovery rests mainly on rising real incomes - which should allow households to consume more - and firms increasing investment.', 'over time, the gradually fading effects of restrictive monetary policy should support a pick-up in domestic demand.', 'we are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target.', 'we will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.', 'in particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.', 'we are not pre-committing to a particular rate path.', 'the decisions taken today are set out in a press release available on our website.', 'i will now outline in more detail how we see the economy and inflation developing and will then explain our assessment of financial and monetary conditions.', 'economic activity the economy grew by 0.4 per cent in the third quarter, exceeding expectations.', 'growth was driven mainly by an increase in consumption, partly reflecting one-off factors that boosted tourism over the summer, and by firms building up inventories.', 'but the latest information suggests it is losing momentum.', 'surveys indicate that manufacturing is still contracting and growth in services is slowing.', 'firms are holding back their investment spending in the face of weak demand and a highly uncertain outlook.', 'exports are also weak, with some european industries finding it challenging to remain competitive.', 'the labour market remains resilient.', 'employment grew by 0.2 per cent in the third quarter, again by more than expected.', 'the unemployment rate remained at its historical low of 6.3 per cent in october.', 'meanwhile, demand for labour continues to weaken.', 'the job vacancy rate declined to 2.5% in the third quarter, 0.8 percentage points below its peak, and surveys also point to fewer jobs being created in the current quarter.', 'the economy should strengthen over time, although more slowly than previously expected.', 'the rise in real wages should strengthen household spending.', 'more affordable credit should boost consumption and investment.', 'provided trade tensions do not escalate, exports should support the recovery as global demand rises.', 'fiscal and structural policies should make the economy more productive, competitive and resilient.', "it is crucial to swiftly follow up, with concrete and ambitious structural policies, on mario draghi's proposals for enhancing european competitiveness and enrico letta's proposals for empowering the single market.", "we welcome the european commission's assessment of governments' medium-term plans for fiscal and structural policies, as part of the eu's revised economic governance framework.", 'governments should now focus on implementing their commitments under this framework fully and without delay.', 'this will help bring down budget deficits and debt ratios on a sustained basis, while prioritising growth-enhancing reforms and investment.', "inflation annual inflation increased to 2.3 per cent in november according to eurostat's flash estimate, from 2.0 per cent in october.", 'the increase was expected and primarily reflected an energy-related upward base effect.', 'food price inflation edged down to 2.8 per cent and services inflation to 3.9 per cent.', 'goods inflation went up to 0.7 per cent.', 'domestic inflation, which closely tracks services inflation, again eased somewhat in october.', 'but at 4.2%, it remains high.', 'this reflects strong wage pressures and the fact that some services prices are still adjusting with a delay to the past inflation surge.', 'that said, underlying inflation is overall developing in line with a sustained return of inflation to target.', 'the increase in compensation per employee moderated to 4.4 per cent in the third quarter from 4.7 per cent in the second.', 'amid stable productivity, this contributed to slower growth in unit labour costs.', 'staff expect labour costs to increase more slowly over the projection horizon as a result of lower wage growth and higher productivity growth.', 'moreover, profits should continue to partially offset the effects of higher labour costs on prices, especially in the near term.', 'we expect inflation to fluctuate around its current level in the near term, as previous sharp falls in energy prices continue to drop out of the annual rates.', 'it should then settle sustainably at around the two per cent medium-term target.', 'easing labour cost pressures and the continuing impact of our past monetary policy tightening on consumer prices should help this process.', "most measures of longer-term inflation expectations stand at around 2 per cent, and market-based indicators of medium to longer-term inflation compensation have decreased measurably since the governing council's october meeting.", 'risk assessment the risks to economic growth remain tilted to the downside.', 'the risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy.', 'lower confidence could prevent consumption and investment from recovering as fast as expected.', "this could be amplified by geopolitical risks, such as russia's unjustified war against ukraine and the tragic conflict in the middle east, which could disrupt energy supplies and global trade.", 'growth could also be lower if the lagged effects of monetary policy tightening last longer than expected.', 'it could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster.', 'inflation could turn out higher if wages or profits increase by more than expected.', 'upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade.', 'moreover, extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices by more than expected.', 'by contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly.', 'greater friction in global trade would make the euro area inflation outlook more uncertain.', 'financial and monetary conditions market interest rates in the euro area have declined further since our october meeting, reflecting the perceived worsening of the economic outlook.', 'although financing conditions remain restrictive, our interest rate cuts are gradually making it less expensive for firms and households to borrow.', 'the average interest rate on new loans to firms was 4.7 per cent in october, more than half a percentage point below its peak a year earlier.', 'the cost of issuing market-based debt has fallen by more than a percentage point since its peak.', 'the average rate on new mortgages, at 3.6 per cent in october, is about half a percentage point lower than at its highest point in 2023, even though the average rate on the outstanding stock of mortgages is still set to rise.', 'bank lending to firms has gradually picked up from low levels, and increased by 1.2 per cent in october compared with a year earlier.', 'debt securities issued by firms were up 3.1% in annual terms, which was similar to the increase in the previous few months.', 'mortgage lending continued to rise gradually in october, with an annual growth rate of 0.8 per cent.', 'in line with our monetary policy strategy, the governing council thoroughly assessed the links between monetary policy and financial stability.', 'euro area banks remain resilient and there are few signs of financial market stress.', 'financial stability risks nonetheless remain elevated.', 'macroprudential policy remains the first line of defence against the build-up of financial vulnerabilities, enhancing resilience and preserving macroprudential space.', 'conclusion the governing council today decided to lower the three key ecb interest rates by 25 basis points.', 'in particular, the decision to lower the deposit facility rate - the rate through which we steer the monetary policy stance - is based on our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.', 'we are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target.', 'we will follow a datadependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.', 'in particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.', 'we are not pre-committing to a particular rate path.', 'in any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilises sustainably at our medium-term target and to preserve the smooth functioning of monetary policy transmission.', 'we are now ready to take your questions.']
|
Christine Lagarde
|
European Central Bank
|
President
|
European Central Bank
|
https://www.bis.org/review/r241219b.htm
|
Jan Frait: Twenty years of financial stability at the Czech National Bank
|
Opening remarks by Mr Jan Frait, Deputy Governor of the Czech National Bank, at the Czech National Bank Workshop on Financial Stability and Macroprudential Policy, Prague, 17 December 2024.
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2024-12-17 00:00:00
|
Jan Frait: Twenty years of financial stability at the Czech National
Bank
Opening remarks by Mr Jan Frait, Deputy Governor of the Czech National Bank, at the
Czech National Bank Workshop on Financial Stability and Macroprudential Policy,
Prague, 17 December 2024.
* * *
We meet here today - first of all - to celebrate 20 years of financial stability at the
Czech National Bank (CNB). In May 2004, the CNB Board endorsed the key features of
our financial stability function: its mandate and objective, the definition of financial
stability, the content of financial stability analyses and the meaning of macroprudential
policy. It also announced the foundation of a financial stability team in the research
department.
It is not easy to find traces of the original decision in the public domain. We were a bit
secretive about it at the time. This was because there wasn't full support in the Board
for this strange thing called "macroprudential". There was also limited support for it in
the regulation and microprudential supervision departments back then.
As a matter of fact, I revealed that we had set up a financial stability function to a local
audience in January 2005 at the earliest, in my presentation on the conclusions of the
2004 Financial Stability Report. This presentation was only published in Czech, as we
did not think anyone would be interested - except for the Bank for International
Settlements (BIS), which had the same idea on its agenda.
You may ask why the Board decided to establish a financial stability function anyway.
One reason was a severe banking crisis that had occurred between 1997 and 2000,
which had its roots in macroeconomic mismanagement, among other things. The other
- and potentially more important - factor was the influence of certain BIS economists
that some of us admired. The BIS chief economist William White had given an
impressive lecture in this Congress Centre in 2003. That may have been the lucky
breaking point.
Just as a matter of interest, in May 2004 the CNB adopted the following definition of
financial stability: a situation in which the financial system (a) fulfils its functions without
disturbances and negative effects on the present and future development of the
economy, and (b) at the same time shows a high degree of resilience to adverse
shocks. This definition is still in place after 20 years. Simply perfect right off the bat.
One more important thing happened 20 years ago. In May 2004, the government
approved a plan to integrate the then fragmented supervision of the local financial
market. At the time, the CNB was just the bank regulator and there were three other
supervisory institutions. This government decision made us work hard to take over the
others and bring them under the CNB's roof. This was actually not what the government
had originally envisaged, but we were lucky and won the battle. Some think it was a
kind of hostile takeover. No matter what it was, it took some time to complete -
parliament did not approve the integration plan until the end of 2005. The CNB became
the sole supervisor in April 2006.
There is one more important anniversary this year that no one speaks of. Ten years
ago, at the end of November 2014, the Board decided to introduce a supervisory tool to
address potential sovereign risk in the banking sector. As far as I know, we were the
first and likely the last authority in Europe to establish any kind of sovereign risk
instrument. Every year since 2015, the CNB has conducted a public finance stress test
and informed banks whether sovereign exposures above a certain level could be
subject to a Pillar II capital add-on.
To begin with, we were silent about the introduction of this tool as well. The decision
was revealed in June 2015. At the time, it was viewed as a temporary solution before
EU-wide regulation kicked in. With the benefit of hindsight, we were lucky to act early,
before the window of opportunity was closed by the failure of the high-level working
group of the European Economic and Financial Committee to agree on anything in this
area. In summer 2015, the EU authorities recommended to "await the outcomes of the
Basel Committee". We are still waiting. To be honest, the window of opportunity created
by the sovereign debt crisis in the euro area was wide open back then - we even
managed to convince the Ministry of Finance to support the introduction of the tool.
Looking at the state of public finances across a number of advanced economies today,
one slogan inevitably comes to my mind as to the future: Never waste a good crisis!
For now, enjoy the conference.
|
['jan frait: twenty years of financial stability at the czech national bank opening remarks by mr jan frait, deputy governor of the czech national bank, at the czech national bank workshop on financial stability and macroprudential policy, prague, 17 december 2024.', '* * * we meet here today - first of all - to celebrate 20 years of financial stability at the czech national bank (cnb).', 'in may 2004, the cnb board endorsed the key features of our financial stability function: its mandate and objective, the definition of financial stability, the content of financial stability analyses and the meaning of macroprudential policy.', 'it also announced the foundation of a financial stability team in the research department.', 'it is not easy to find traces of the original decision in the public domain.', 'we were a bit secretive about it at the time.', 'this was because there wasn\'t full support in the board for this strange thing called "macroprudential".', 'there was also limited support for it in the regulation and microprudential supervision departments back then.', 'as a matter of fact, i revealed that we had set up a financial stability function to a local audience in january 2005 at the earliest, in my presentation on the conclusions of the 2004 financial stability report.', 'this presentation was only published in czech, as we did not think anyone would be interested - except for the bank for international settlements (bis), which had the same idea on its agenda.', 'you may ask why the board decided to establish a financial stability function anyway.', 'one reason was a severe banking crisis that had occurred between 1997 and 2000, which had its roots in macroeconomic mismanagement, among other things.', 'the other - and potentially more important - factor was the influence of certain bis economists that some of us admired.', 'the bis chief economist william white had given an impressive lecture in this congress centre in 2003. that may have been the lucky breaking point.', 'just as a matter of interest, in may 2004 the cnb adopted the following definition of financial stability: a situation in which the financial system (a) fulfils its functions without disturbances and negative effects on the present and future development of the economy, and (b) at the same time shows a high degree of resilience to adverse shocks.', 'this definition is still in place after 20 years.', 'simply perfect right off the bat.', 'one more important thing happened 20 years ago.', 'in may 2004, the government approved a plan to integrate the then fragmented supervision of the local financial market.', 'at the time, the cnb was just the bank regulator and there were three other supervisory institutions.', "this government decision made us work hard to take over the others and bring them under the cnb's roof.", 'this was actually not what the government had originally envisaged, but we were lucky and won the battle.', 'some think it was a kind of hostile takeover.', 'no matter what it was, it took some time to complete - parliament did not approve the integration plan until the end of 2005. the cnb became the sole supervisor in april 2006. there is one more important anniversary this year that no one speaks of.', 'ten years ago, at the end of november 2014, the board decided to introduce a supervisory tool to address potential sovereign risk in the banking sector.', 'as far as i know, we were the first and likely the last authority in europe to establish any kind of sovereign risk instrument.', 'every year since 2015, the cnb has conducted a public finance stress test and informed banks whether sovereign exposures above a certain level could be subject to a pillar ii capital add-on.', 'to begin with, we were silent about the introduction of this tool as well.', 'the decision was revealed in june 2015. at the time, it was viewed as a temporary solution before eu-wide regulation kicked in.', 'with the benefit of hindsight, we were lucky to act early, before the window of opportunity was closed by the failure of the high-level working group of the european economic and financial committee to agree on anything in this area.', 'in summer 2015, the eu authorities recommended to "await the outcomes of the basel committee".', 'we are still waiting.', 'to be honest, the window of opportunity created by the sovereign debt crisis in the euro area was wide open back then - we even managed to convince the ministry of finance to support the introduction of the tool.', 'looking at the state of public finances across a number of advanced economies today, one slogan inevitably comes to my mind as to the future: never waste a good crisis!', 'for now, enjoy the conference.']
|
Jan Frait
|
Czech National Bank
|
Deputy Governor
|
Czech
|
https://www.bis.org/review/r241219a.htm
|
Kevin Greenidge: Micro, small, and medium-sized enterprises are the backbone of our economy
|
Address by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at a visit of the President and delegation of the Inter-American Development Bank to the Central Bank of Barbados, Bridgetown, 13 December 2024.
|
2024-12-13 00:00:00
|
Kevin Greenidge: Micro, small, and medium-sized enterprises are the
backbone of our economy
Address by Dr Kevin Greenidge, Governor of the Central Bank of Barbados, at a visit of
the President and delegation of the Inter-American Development Bank to the Central
Bank of Barbados, Bridgetown, 13 December 2024.
* * *
I am deeply honoured to welcome President Goldfajn and the esteemed IDB delegation
to the Central Bank of Barbados. It is a privilege to host this important conversation
today with both your team, the participating financial institutions, and the beneficiaries
of the IDB's impactful funding over the past decade. In this regard, the IDB, as a leading
multilateral organisation, has played a critical role in the development of local small and
medium-sized businesses, particularly through its steadfast support of the Central
Bank's Enhanced Credit Guarantee Fund (ECGF). For this, we remain deeply grateful
and committed to our continued collaboration.
Micro, small, and medium-sized enterprises (MSMEs) are widely recognised as the
backbone of our economy. The IDB's funding has assisted our MSMEs to deal with the
structural barriers to accessing finance, which is critical to the enhancement of their
competitiveness, productivity, and resilience. These are all keep elements to the growth
of MSMEs and provide a means to bolster their economic and financial contribution in
small countries, like Barbados.
Since 2015, the ECGF, which is a partial credit guarantee scheme that we at the
Central Bank of Barbados manage, was established with the support of United States
Dollar (USD) loan funding from the Inter-American Development Bank to the
Government of Barbados. This IDB's assistance has contributed to MSME's productive
business investments in Barbados by helping them to secure financing from domestic
financial institutions.
Under the ECGF, the Central Bank issues partial credit guarantees of up to 80 percent
of the total loan amount, which are intended to collateralise various categories of loans
from eligible financial institutions up to US$1 million for a maximum period of 10 years.
We have overseen two of these loan programmes from the IDB to date. The specific
objective of the first round of loan funding in 2015 was to boost the productivity and
competitiveness of SMEs. The scope of the second loan programme in 2021, i.e., the
Global Programme for Safeguarding the Productive Sectors and Employment, built on
the momentum of the first by providing collateral support to MSMEs seeking financing
during the COVID-19 pandemic period, primarily for short-term working capital needs
and medium-term productive business investments.
These programmes have been fully disbursed, and the Central Bank is currently
collaborating with the Government of Barbados to negotiate a third round of funding
from the IDB for USD 50 million, which will have an expanded focus of:
1. enhancing export readiness and diversification, innovative investment, food
security, and climate adaptation;
2. increasing the financial inclusion of women-led/owned business and persons with
disabilities; and
3. leveraging technical assistance to support capacity building and training of
MSMEs.
Since the launch of the ECGF a decade ago, I can confidently state the operation of the
ECGF has achieved its general objective of enhancing MSME's access to
muchneeded loan funding. In fact, during this period, the Central Bank has approved 326
guarantees totalling over USD 65 million for loans from eight participating financial
institutions. Furthermore, during the second loan programme to provide financing
support during the COVID-19 pandemic, there was an increased demand for
guarantees on loans to the renewable energy sector, which represented one-third of the
total guaranteed amount. I am hearted that this sector is also posed to receive
additional support in the third round of IDB funding support.
It is evident that IDB continues to be a valuable development partner that is
instrumental to Barbados achieving its sustainable development goals. We will
endeavour to maintain our strong collaboration into the future, and to provide the
required support for our small business sector.
We are heartened by the participation of the MSMEs and their financial institutions,
including the Enterprise Growth Fund Limited, which has a mandate of providing
financing to small businesses working capital purposes across the various economic
sectors, including the renewable energy sector.
I look forward to hearing first-hand the financial institutions' and businesses'
experiences with the ECGF and to a lively dialogue on the important topic of access to
financing for MSMEs. Once again, welcome to everyone.
|
['kevin greenidge: micro, small, and medium-sized enterprises are the backbone of our economy address by dr kevin greenidge, governor of the central bank of barbados, at a visit of the president and delegation of the inter-american development bank to the central bank of barbados, bridgetown, 13 december 2024.', '* * * i am deeply honoured to welcome president goldfajn and the esteemed idb delegation to the central bank of barbados.', "it is a privilege to host this important conversation today with both your team, the participating financial institutions, and the beneficiaries of the idb's impactful funding over the past decade.", "in this regard, the idb, as a leading multilateral organisation, has played a critical role in the development of local small and medium-sized businesses, particularly through its steadfast support of the central bank's enhanced credit guarantee fund (ecgf).", 'for this, we remain deeply grateful and committed to our continued collaboration.', 'micro, small, and medium-sized enterprises (msmes) are widely recognised as the backbone of our economy.', "the idb's funding has assisted our msmes to deal with the structural barriers to accessing finance, which is critical to the enhancement of their competitiveness, productivity, and resilience.", 'these are all keep elements to the growth of msmes and provide a means to bolster their economic and financial contribution in small countries, like barbados.', 'since 2015, the ecgf, which is a partial credit guarantee scheme that we at the central bank of barbados manage, was established with the support of united states dollar (usd) loan funding from the inter-american development bank to the government of barbados.', "this idb's assistance has contributed to msme's productive business investments in barbados by helping them to secure financing from domestic financial institutions.", 'under the ecgf, the central bank issues partial credit guarantees of up to 80 percent of the total loan amount, which are intended to collateralise various categories of loans from eligible financial institutions up to us$1 million for a maximum period of 10 years.', 'we have overseen two of these loan programmes from the idb to date.', 'the specific objective of the first round of loan funding in 2015 was to boost the productivity and competitiveness of smes.', 'the scope of the second loan programme in 2021, i.e., the global programme for safeguarding the productive sectors and employment, built on the momentum of the first by providing collateral support to msmes seeking financing during the covid-19 pandemic period, primarily for short-term working capital needs and medium-term productive business investments.', 'these programmes have been fully disbursed, and the central bank is currently collaborating with the government of barbados to negotiate a third round of funding from the idb for usd 50 million, which will have an expanded focus of: 1. enhancing export readiness and diversification, innovative investment, food security, and climate adaptation; 2. increasing the financial inclusion of women-led/owned business and persons with disabilities; and 3. leveraging technical assistance to support capacity building and training of msmes.', "since the launch of the ecgf a decade ago, i can confidently state the operation of the ecgf has achieved its general objective of enhancing msme's access to muchneeded loan funding.", 'in fact, during this period, the central bank has approved 326 guarantees totalling over usd 65 million for loans from eight participating financial institutions.', 'furthermore, during the second loan programme to provide financing support during the covid-19 pandemic, there was an increased demand for guarantees on loans to the renewable energy sector, which represented one-third of the total guaranteed amount.', 'i am hearted that this sector is also posed to receive additional support in the third round of idb funding support.', 'it is evident that idb continues to be a valuable development partner that is instrumental to barbados achieving its sustainable development goals.', 'we will endeavour to maintain our strong collaboration into the future, and to provide the required support for our small business sector.', 'we are heartened by the participation of the msmes and their financial institutions, including the enterprise growth fund limited, which has a mandate of providing financing to small businesses working capital purposes across the various economic sectors, including the renewable energy sector.', "i look forward to hearing first-hand the financial institutions' and businesses' experiences with the ecgf and to a lively dialogue on the important topic of access to financing for msmes.", 'once again, welcome to everyone.']
|
Dr Kevin Greenidge
|
Central Bank of Barbados
|
Governor
|
Barbados
|
https://www.bis.org/review/r241218e.htm
|
Isabel Schnabel: Navigating towards neutral
|
Keynote speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the CEPR Paris Symposium 2024, hosted by the Banque de France, Paris, 16 December 2024.
|
2024-12-16 00:00:00
|
SPEECH
Navigating towards neutral
Keynote speech by Isabel Schnabel, Member of the Executive
Board of the ECB, at the CEPR Paris Symposium 2024 hosted by
the Banque de France
Paris, 16 December 2024
Monetary policy is at a critical juncture.
Growing confidence in a sustainable decline of inflation towards our 2% target has allowed the
Governing Council to remove substantial policy restriction over the past six months. With our decision
last week to cut the three key policy rates by a further 25 basis points, the deposit facility rate is now
at 3%, one percentage point below its peak.
Today I will argue that, with interest rates approaching neutral territory and with risks to the inflation
outlook broadly balanced, monetary policy should proceed gradually and remain data-dependent.
In this way, we can ensure that disinflation does not stall above our 2% target, while avoiding
unnecessary weakness in the labour market and the economy at large.
I will also argue that, once price stability has been restored, the challenges for monetary policy will
change. As inflation becomes dominated by idiosyncratic shocks again, central banks can afford to be
more tolerant of moderate deviations from target - in both directions.
Staff projections confirm nearing return to price stability
Incoming data and the new Eurosystem staff projections have confirmed that the disinflation process
remains well on track.
Inflation is now expected to decline towards our 2% target in the course of 2025 and to oscillate
around this level over the projection horizon, as domestic price pressures ease and base effects from
energy prices fade (Slide 2, left-hand side).
Growth has been revised down but is still expected to accelerate next year, as consumption and
investment recover on the back of rising real incomes and less restrictive financing conditions (Slide 2,
right-hand side).
As ECB staff continue to project that the euro area economy will expand at a pace around its potential
growth rate in the coming years, inflation should neither over- nor undershoot our 2% target materially
over the projection horizon once past shocks have fully unwound.
Three factors support the assumptions underlying this projected recovery.
One is the upside surprise to growth in the third quarter, with private consumption picking up and
inventories no longer weighing on growth (Slide 3, left-hand side). A turnaround in the inventory cycle
would remove a significant drag on aggregate demand.
Second, confidence in the retail trade sector as well as consumer expectations for major purchases
over the next twelve months continued to improve in November, while savings intentions declined
somewhat (Slide 3, right-hand side).
Third, according to model-based analyses, over the next twelve months an economic expansion is still
much more probable than a recession, despite the prospect of more trade barriers clouding the euro
area economic outlook (Slide 4, left-hand side).
Although the baseline forecast does not incorporate the potential impact of concrete policy measures
of the new Trump administration, as these remain uncertain, recent sentiment indicators are likely to
partially reflect the surge in trade policy uncertainty already (Slide 4, right-hand side).
Empirical research suggests that, rather than the actual tariff increase itself, it is the rise in uncertainty
that will be the main drag on growth. But these effects are often estimated to be short-lived, with
growth rebounding sharply once uncertainty fades.
Gradual removal of policy restriction remains appropriate
The staff projections are therefore consistent with bringing interest rates to a neutral setting as inflation
stabilises sustainably around our 2% target.
The question then is how fast we should remove policy restriction.
Our decision last week to cut our key policy rates by 25 basis points reflects the conviction that a
gradual and data-dependent approach remains the most appropriate strategy.!2]
There are three reasons for this.
Dot the i's and cross the t's
First, while we are increasingly confident that price stability is within reach, an important part of
disinflation has yet to materialise.
Services inflation, in particular, remains high at 3.9%. At the same time, momentum indicators, such as
the three-month-on-three-month rate, suggest that price pressures have started to ease. But such
signals critically depend on the way the seasonal adjustment is done.
For example, shifts in households' consumption patterns in the wake of the pandemic may be making
the seasonal adjustment more difficult. Estimates by financial market participants suggest that, when
correcting for these potential shifts, momentum could be measurably higher than what our current
estimates imply./2]
Indeed, over the past two years, November has turned out to be a notable outlier in terms of the
month-on-month change in services inflation (Slide 5, left-hand side).
Also, while the baseline scenario assumes a cyclical recovery in productivity growth that is expected to
ease the growth in unit labour costs, hysteresis effects or other structural factors could weigh on
productivity and investment over an extended period of time.
Recent scenario analysis conducted by ECB staff shows that, in that case, growth would be lower and
inflation higher - 0.3 percentage points cumulatively by 2026 - than in the baseline (Slide 5, right-hand
side).4] These effects would rise notably if the forces weighing on productivity growth were more
permanent.
So, even if most of the evidence points to continued disinflation, we should remain alert to signs that
cast doubt on our baseline. A gradual approach allows us to react to such signs.
Balance of risks can shift as new shocks materialise
Second, new shocks keep hitting the euro area economy, many of them posing upside risks to
inflation.
Gas prices, for example, have doubled since February (Slide 6, left-hand side). As a result, wholesale
electricity prices have increased substantially. Food prices, too, have started rising at a concerning
pace, at an annualised three-month-on-three-month rate of 4.6% in November, up from 0.9% in May
(Slide 6, right-hand side).
Moreover, climate mitigation measures are increasingly affecting prices over the medium term.
In 2027, for example, Eurosystem staff expect inflation to rise above 2%, mainly due to the planned
expansion of the EU emissions trading system to buildings, road transport and small industry (ETS2).
[5]
In addition, while the direction and persistence of the various effects of potential tariffs on inflation are
ambiguous, their net effect is often estimated to be positive.
While a decline in foreign demand for euro area goods as well as trade diversion, especially from
China, are likely to be disinflationary, several channels could mitigate or even offset these forces.
For example, the EU may retaliate with tariffs of its own, as it did in 2018. Also, the parallel impulse to
the US economy coming from expansionary fiscal and supply-side policies could support foreign
demand, even as tariffs increase, because many products are not substitutable in the short run.
Finally, since the end of September the euro has depreciated by more than 6% against the US dollar,
largely in anticipation of the incoming US administration's economic policy intentions. This is already
putting upward pressure on import prices.
Such inflationary shocks are of particular concern in the current environment, as people are paying
more attention to inflation after recent experiences. The latest Eurobarometer reveals that inflation
remains people's biggest concern in most euro area countries.!©! This attention makes inflation
expectations more vulnerable after a long period of high inflation.
Proceeding gradually allows us to respond to new shocks in an environment of elevated uncertainty
and volatility.
Data dependence needed to assess the degree of policy restriction
Third, a gradual approach is the most appropriate course of action the closer we are getting to neutral
territory.
There are two related sets of benchmarks for monetary policy.
One is simple Taylor-type policy rules that are used in most structural models to replicate the
systematic response of monetary policy to movements in inflation and growth. While such rules need
to be treated with caution, they are a useful policy benchmark.
As there are many ways such rules can be formulated and estimated, it is helpful to use a thick-
modelling framework that reduces some of the data and model uncertainty.
Such a framework currently suggests that the median rule points to a gradual dialling back of policy
restriction (Slide 7). It also suggests that the distribution of projected interest rate outcomes is skewed
to the upside.
The second benchmark is the natural real rate of interest, r*. There is no consensus on what its main
drivers are, or on how to best estimate it. As a result, the range of estimates is exceptionally large,
both within and across models.
Recent analysis by ECB staff across a suite of models suggest that the point estimate of r* ranges
from about -0.5% to 1%, or about 1.5% to 3% in nominal terms. This is similar to recent estimates by
economists from the Bank for International Settlements. ©]
Significant parameter uncertainty makes it even more challenging to use the natural rate as a
guidepost for monetary policy.
In this uncertain environment, it is helpful to focus on what has changed in recent years to understand
whether real equilibrium rates could be higher today than during the 2010s. An increase would warrant
a more cautious approach by central banks removing policy restriction.
Changes in the demand for and supply of global savings suggest that equilibrium rates may have
increased in recent years.
The pandemic, Russia's invasion of Ukraine and other shocks have led to an increase in public debt
around the world (Slide 8, left-hand side). Net borrowing by governments remains substantial. In 2024,
the public deficit will be around 5% of GDP across advanced economies and it is expected to decline
only marginally in the coming years, also reflecting borrowing requirements associated with the digital
and green transitions (Slide 8, right-hand side).
The International Monetary Fund (IMF) projects that, in the coming years, overall global investment -
public and private - will reach the highest share in GDP since the 1980s.
It is likely that, as a result, real interest rates need to rise to clear the global market for savings. This
may especially be the case as rising geopolitical fragmentation contributes to reducing the supply of
savings, including those provided by price-insensitive investors.
In the United States, for example, the decline in the share of foreign official holdings of US Treasury
securities has accelerated in recent years (Slide 9, left-hand side). It is now at the lowest level in more
than twenty years.l2]
Incidentally, since about late 2022, asset swap spreads started to widen measurably in both the euro
area and the United States, suggesting that investors are gradually demanding a higher return to
warehouse the supply of global public bonds (Slide 9, right-hand side).4
These developments are contributing to the reversal of the global savings glut, which put notable
downward pressure on real rates for the greater part of the 21st century.)
This has repercussions for the assessment of the monetary policy stance.
For example, given the notable increase in real short-term rates expected to prevail in the distant
future, which are often taken as proxies for the natural rate, the policy stance today may already be in
neutral territory, as real spot rates have started to fall below their equilibrium levels (Slide 10).
Other indicators point in a similar direction.
In our most recent bank lending survey, for example, 93% of banks report that the general level of
interest rates no longer plays a role in explaining weak loan demand. This contrasts sharply with a
year ago when almost half of the banks said that interest rates were a factor contributing to lower loan
demand.
Similarly, the survey on the access to finance of enterprises shows that the pressure from interest
expenses is gradually easing. The net percentage of firms indicating an increase in interest expenses
fell from 36% to 19%, reaching similar levels to those recorded at the end of 2021.
Finally, among households, we have observed a notable turnaround in the demand for housing loans.
Anet 39% of banks reported higher demand in the third quarter, a share close to the historical peak of
45% and well above the historical average (Slide 11, left-hand side).
This increase in the demand for housing loans is broad-based across countries. Banks expect it to
continue, reflecting both the decline in mortgage rates and improving housing market prospects. In the
second quarter, the euro area house price index rose for the first time in more than a year (Slide 11,
right-hand side).
Return to price stability requires different conduct of monetary
policy
All this suggests that we should proceed with caution and remain data-dependent, assessing at each
monetary policy meeting whether disinflation remains on track and whether, and to what extent,
interest rates remain restrictive. In doing so, we can continuously cross-check the assumptions
underlying the staff projections and thereby retain a forward-looking perspective.
This is especially important at a time when past pandemic-related shocks are starting to recede, and
new shocks are increasingly driving price and wage dynamics.
This shift in regime - from a high-inflation environment to one where inflation is consistent with price
stability - has two important implications for the conduct of monetary policy.2]
The effectiveness of monetary policy depends on the inflation regime
One is that it has a direct impact on the effectiveness of monetary policy.
The success of central banks in paving the way towards restoring price stability after the recent
inflation surge has a lot to do with how monetary policy works. In a high-inflation regime, price
increases tend to reflect factors common to most goods and services.
This is what has happened in recent years. The common component of inflation rose sharply as firms
reacted to the combination of higher energy prices, supply-side bottlenecks and pent-up demand after
the pandemic-induced lockdowns. This was reflected in the rapid broadening of inflation pressures
across the goods and services contained in the consumption basket (Slide 12).
Ultimately, these shocks affected all sectors of the economy, especially when second-round effects
pushed wage demands higher across firms. Wage-price spirals are often the clearest sign of a regime
shift, when changes in the general price level become a coordination device for price and wage
setters.
As monetary policy affects aggregate demand as well as the inflation expectations of both firms and
households, it is powerful in counteracting such common shocks (Slide 13, left-hand side).
As this process is nearing completion and we are re-entering a regime of price stability, idiosyncratic
price shocks that reflect relative price changes, and that are mostly independent of each other, will
again dominate in driving aggregate inflation.
This is reflected in the measurable decline of the common component.
Idiosyncratic price changes, however, tend to be less responsive to changes in aggregate demand and
hence to changes in monetary policy (Slide 13, right-hand side). As a result, monetary policy becomes
less effective in steering overall inflation.
Central banks then need to carefully weigh the benefits and costs of trying to lean against relative
price shocks. The strongest case for acting is when prices start to co-move again, either because of a
new large shock or a series of shocks that move prices in the same direction.
But in the absence of such shocks, policy should be careful not to overreact.
This is especially the case if idiosyncratic shocks reflect structural forces. While it is inherently difficult
to separate cyclical from structural factors, surveys among firms suggest that a significant part of the
current weakness in parts of our economy relates to forces outside the realm of monetary policy.
In our latest corporate telephone survey, for example, firms reported that the recent decline in
business sentiment was driven by growing concerns about political developments, both in Europe and
globally, and waning competitiveness amid high energy costs and the green transition.
Firms expressed concerns about rising regulatory costs, such as those resulting from the Corporate
Sustainability Reporting Directive (CSRD) or the Corporate Sustainability Due Diligence Directive
(CSDDD). Compliance with these and other directives is seen as complex and resource-intensive,
especially for smaller firms.]
In other cases, such as the General Data Protection Regulation (GDPR) or the Artificial Intelligence
(Al) Act, there is mounting concern that regulation is increasingly stifling innovation and competition,
especially in important areas such as Al.[44]
Particularly in Germany and France, these structural headwinds are causing businesses to postpone,
or even refrain from, transformative investments and focus instead on efficiency and cost-cutting,
which, in turn, is weighing on consumer confidence and spending.
An expansionary monetary policy stance will change this dynamic only marginally, if at all.
Recent research by Oscar Jorda, Sanjay Singh and Alan Taylor corroborates this view. It shows
that, while the effects of tight monetary policy can be persistent, central banks cannot boost potential
output by bringing rates into expansionary territory (Slide 14, left-hand side).
And while the benefits of using monetary policy to deal with idiosyncratic shocks are likely to be
limited, the welfare costs that it has for society can be significant.
One of the costs is that relative price adjustments support the efficient allocation of resources within
the economy. Leaning too strongly against them in the absence of clear risks to price stability may
inhibit this process.
The other is that valuable policy space is lost and so will not be available to support employment and
growth when the economy faces shocks that monetary policy can deal with more effectively.
This was the case when the pandemic hit. At that time, interest rates were already close to their
effective lower bound. As a result, central banks needed to resort to unconventional policy
instruments. However, the effectiveness of such measures in stimulating aggregate demand is more
uncertain, while their potential side effects are larger."
Greater tolerance for moderate deviations of inflation from target
The second implication is that, when relative price shocks dominate, inflation is largely self-stabilising.
As a result, central banks can have a greater tolerance for moderate deviations of inflation from target,
in both directions.
The reason is that the impact of changes in aggregate demand on inflation is weaker in an
environment in which price changes are largely independent from each other. That is, the Phillips
curve is highly non-linear: its slope is often steep when inflation is high, and it is flat when inflation is
low.
In this environment, it takes a large shock to aggregate demand for inflation to measurably and
persistently drift away from the economy's nominal anchor - our 2% target. So there is less need for
policy to respond to moderate shocks.
This is especially true for disinflationary shocks. Overwhelming empirical evidence suggests that
nominal wage cuts are extremely rare and that the frequency at which firms adjust prices lower is
highly stable over time (Slide 14, right-hand side).(48]
And when prices and wages do not chase each other as they did over the past years, inflation is
largely self-stabilising. As such, the risk of falling into a truly harmful deflationary spiral is limited.
Monetary policy can then be more patient and allow inflation to deviate from target for longer than in a
situation in which risks of second-round effects are larger.
This can also be seen in the historical properties of commodity price shocks.
When oil prices fell sharply and persistently in 2014, the pass-through to consumer prices and wages
was moderate. Underlying inflation, while weak, never fundamentally drifted away from our 2% target.
But in 2022, when inflation was already rising on the back of the repercussions of the pandemic, firms
raised their prices considerably and much more frequently than when inflation was low and stable.
Conclusion
Let me now conclude with three main take-aways.
First, price stability is within reach. Considering the risks and uncertainties we are still facing, lowering
policy rates gradually towards a neutral level is the most appropriate course of action.
Second, once price stability has been restored in a sustainable manner, the behaviour of inflation will
change such that central banks can afford to tolerate moderate deviations of inflation from target, in
both directions.
Given limited policy space, monetary policy should focus on responding forcefully to shocks that have
the capacity to destabilise inflation expectations by pushing inflation measurably and persistently away
from our 2% target over the medium term.
Third, monetary policy is not a supply-side instrument. It cannot resolve structural issues that durably
weigh on price pressures, as was the case during the 2010s, when a highly accommodative monetary
policy stance over a long period was unable to lift the economy out of the low-growth, low-inflation
environment. Structural policies are the responsibility of governments.
Thank you.
Annexes
16 December 2024
Presentation slides
1.
Bloom, N. (2009), "The Impact of Uncertainty Shocks', Econometrica, Vol. 77(3), pp. 623-685.
2.
Lagarde, C. (2024), "Monetary policy in the euro area", speech at the Bank of Lithuania's Annual
Economics Conference on "Pillars of Resilience Amid Global Geopolitical Shifts", on the occasion of
the 10th anniversary of euro introduction, Vilnius, Lithuania, 16 December.
3.
Choraria, N. (2024), Inflation Trading, Goldman Sachs International, 9 November.
4.
ECB (2024), Eurosystem staff macroeconomic projections for the euro area, June.
5.
European Commission, ETS2: buildings, road transport and additional sectors.
6.
Eurobarometer, November 2024.
7.
Brand, C., Lisack, N. and Mazelis, F. (2024), "Estimates of the natural interest rate for the euro area:
an update", Economic Bulletin, Issue 1, ECB.
8.
Benigno, G., Hofmann, B., Nufio, G. and Sandri, D. (2024), "Quo vadis, r*? The natural rate of interest
after the pandemic", B/S Quarterly Review, March.
9.
This has coincided with the price of gold - the world's other safe haven asset - having more than
doubled over the past ten years.
10.
Real rates could rise more substantially if investors were to regard government bonds as less safe,
pushing equilibrium risk premia higher. Analysis by the IMF, for example, suggests that if the premia
were to rise back to pre-2000 average levels, they could bring up natural rates in advanced economies
by 70 basis points. See IMF (2023), "The natural rate of interest: drivers and policy implications',
World Economic Outlook, April.
11.
Bernanke, B. (2005), The Global Saving Glut and the U.S. Current Account Deficit", remarks at the
Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, 10 March.
12.
This part of the speech builds on insights contained in Borio, C., Lombardi, M., Yetman, J. and
ZakrajSek, E. (2023), "The two-regime view of inflation', BIS Papers, No 133.
13.
For instance, Mario Draghi's report on the future of European competitiveness presented estimates of
the costs for complying with the Corporate Sustainability Reporting Directive ranging from €150,000
for non-listed businesses to €1 million for listed companies. Also, according to the 2024 European
Investment Bank survey, nearly a third of small and medium-sized firms report that more than 10% of
their staff are employed to assess and comply with regulatory requirements and standards.
14.
Goldberg, S. (2023), "Balancing act: Protecting privacy, protecting competition", Stanford Institute for
Economic Policy Research, Policy Brief, January; Gal, M. and Aviv, O. (2020), "The Competitive
Effects of the GDPR'", Journal of Competition Law & Economics, Vol. 16(3), pp. 349-391; and Chivot,
E. and Castro, D. (2019), The EU Needs to Reform the GDPR to Remain Competitive in the
Algorithmic Economy, Center for Data Innovation, 13 May.
15.
Jorda, O., Singh, S. and Taylor, A. (2020), "The Long-Run Effects of Monetary Policy", NBER Working
Paper, No 26666.
16.
Schnabel, I. (2024), "The benefits and costs of asset purchases", speech at the 2024 BOJ-IMES
Conference on "Price Dynamics and Monetary Policy Challenges: Lessons Learned and Going
Forward", Tokyo, 28 May; and Schnabel, I. (2024), "Reassessing monetary policy tools in a volatile
macroeconomic environment", speech at the 25th Jacques Polak Annual Research Conference,
Washington, D.C., 14 November.
17.
Benigno, P. and Eggertsson, G. (2023), "It's Baaack: The Surge in Inflation in the 2020s and the
Return of the Non-Linear Phillips Curve", NBER Working Paper, No 31197. See also Hooper, P.,
Mishkin, F.S. and Sufi, A. (2019), "Prospects for Inflation in a High Pressure Economy: is the Phillips
Curve Dead or is it Just Hibernating?", NBER Working Paper, No 25792.
18.
More recent contributions are Grigsby, J., Hurst, E. and Yildirmaz, A. (2021), "Aggregate nominal wage
adjustments: new evidence from administrative payroll data', American Economic Review, Vol. 111,
No 2, pp. 428-471 and Schaefer, D. and Singleton, C. (2023), "The extent of downward nominal wage
rigidity: New evidence from payroll data', Review of Economic Dynamics, Vol. 51, pp. 60-76.
19.
Lagarde (2024, op.cit.).
CONTACT
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['speech navigating towards neutral keynote speech by isabel schnabel, member of the executive board of the ecb, at the cepr paris symposium 2024 hosted by the banque de france paris, 16 december 2024 monetary policy is at a critical juncture.', 'growing confidence in a sustainable decline of inflation towards our 2% target has allowed the governing council to remove substantial policy restriction over the past six months.', 'with our decision last week to cut the three key policy rates by a further 25 basis points, the deposit facility rate is now at 3%, one percentage point below its peak.', 'today i will argue that, with interest rates approaching neutral territory and with risks to the inflation outlook broadly balanced, monetary policy should proceed gradually and remain data-dependent.', 'in this way, we can ensure that disinflation does not stall above our 2% target, while avoiding unnecessary weakness in the labour market and the economy at large.', 'i will also argue that, once price stability has been restored, the challenges for monetary policy will change.', 'as inflation becomes dominated by idiosyncratic shocks again, central banks can afford to be more tolerant of moderate deviations from target - in both directions.', 'staff projections confirm nearing return to price stability incoming data and the new eurosystem staff projections have confirmed that the disinflation process remains well on track.', 'inflation is now expected to decline towards our 2% target in the course of 2025 and to oscillate around this level over the projection horizon, as domestic price pressures ease and base effects from energy prices fade (slide 2, left-hand side).', 'growth has been revised down but is still expected to accelerate next year, as consumption and investment recover on the back of rising real incomes and less restrictive financing conditions (slide 2, right-hand side).', 'as ecb staff continue to project that the euro area economy will expand at a pace around its potential growth rate in the coming years, inflation should neither over- nor undershoot our 2% target materially over the projection horizon once past shocks have fully unwound.', 'three factors support the assumptions underlying this projected recovery.', 'one is the upside surprise to growth in the third quarter, with private consumption picking up and inventories no longer weighing on growth (slide 3, left-hand side).', 'a turnaround in the inventory cycle would remove a significant drag on aggregate demand.', 'second, confidence in the retail trade sector as well as consumer expectations for major purchases over the next twelve months continued to improve in november, while savings intentions declined somewhat (slide 3, right-hand side).', 'third, according to model-based analyses, over the next twelve months an economic expansion is still much more probable than a recession, despite the prospect of more trade barriers clouding the euro area economic outlook (slide 4, left-hand side).', 'although the baseline forecast does not incorporate the potential impact of concrete policy measures of the new trump administration, as these remain uncertain, recent sentiment indicators are likely to partially reflect the surge in trade policy uncertainty already (slide 4, right-hand side).', 'empirical research suggests that, rather than the actual tariff increase itself, it is the rise in uncertainty that will be the main drag on growth.', 'but these effects are often estimated to be short-lived, with growth rebounding sharply once uncertainty fades.', 'gradual removal of policy restriction remains appropriate the staff projections are therefore consistent with bringing interest rates to a neutral setting as inflation stabilises sustainably around our 2% target.', 'the question then is how fast we should remove policy restriction.', 'our decision last week to cut our key policy rates by 25 basis points reflects the conviction that a gradual and data-dependent approach remains the most appropriate strategy.', '!2] there are three reasons for this.', "dot the i's and cross the t's first, while we are increasingly confident that price stability is within reach, an important part of disinflation has yet to materialise.", 'services inflation, in particular, remains high at 3.9%.', 'at the same time, momentum indicators, such as the three-month-on-three-month rate, suggest that price pressures have started to ease.', 'but such signals critically depend on the way the seasonal adjustment is done.', "for example, shifts in households' consumption patterns in the wake of the pandemic may be making the seasonal adjustment more difficult.", 'estimates by financial market participants suggest that, when correcting for these potential shifts, momentum could be measurably higher than what our current estimates imply./2] indeed, over the past two years, november has turned out to be a notable outlier in terms of the month-on-month change in services inflation (slide 5, left-hand side).', 'also, while the baseline scenario assumes a cyclical recovery in productivity growth that is expected to ease the growth in unit labour costs, hysteresis effects or other structural factors could weigh on productivity and investment over an extended period of time.', 'recent scenario analysis conducted by ecb staff shows that, in that case, growth would be lower and inflation higher - 0.3 percentage points cumulatively by 2026 - than in the baseline (slide 5, right-hand side).4] these effects would rise notably if the forces weighing on productivity growth were more permanent.', 'so, even if most of the evidence points to continued disinflation, we should remain alert to signs that cast doubt on our baseline.', 'a gradual approach allows us to react to such signs.', 'balance of risks can shift as new shocks materialise second, new shocks keep hitting the euro area economy, many of them posing upside risks to inflation.', 'gas prices, for example, have doubled since february (slide 6, left-hand side).', 'as a result, wholesale electricity prices have increased substantially.', 'food prices, too, have started rising at a concerning pace, at an annualised three-month-on-three-month rate of 4.6% in november, up from 0.9% in may (slide 6, right-hand side).', 'moreover, climate mitigation measures are increasingly affecting prices over the medium term.', 'in 2027, for example, eurosystem staff expect inflation to rise above 2%, mainly due to the planned expansion of the eu emissions trading system to buildings, road transport and small industry (ets2).', '[5] in addition, while the direction and persistence of the various effects of potential tariffs on inflation are ambiguous, their net effect is often estimated to be positive.', 'while a decline in foreign demand for euro area goods as well as trade diversion, especially from china, are likely to be disinflationary, several channels could mitigate or even offset these forces.', 'for example, the eu may retaliate with tariffs of its own, as it did in 2018. also, the parallel impulse to the us economy coming from expansionary fiscal and supply-side policies could support foreign demand, even as tariffs increase, because many products are not substitutable in the short run.', "finally, since the end of september the euro has depreciated by more than 6% against the us dollar, largely in anticipation of the incoming us administration's economic policy intentions.", 'this is already putting upward pressure on import prices.', 'such inflationary shocks are of particular concern in the current environment, as people are paying more attention to inflation after recent experiences.', "the latest eurobarometer reveals that inflation remains people's biggest concern in most euro area countries.!©!", 'this attention makes inflation expectations more vulnerable after a long period of high inflation.', 'proceeding gradually allows us to respond to new shocks in an environment of elevated uncertainty and volatility.', 'data dependence needed to assess the degree of policy restriction third, a gradual approach is the most appropriate course of action the closer we are getting to neutral territory.', 'there are two related sets of benchmarks for monetary policy.', 'one is simple taylor-type policy rules that are used in most structural models to replicate the systematic response of monetary policy to movements in inflation and growth.', 'while such rules need to be treated with caution, they are a useful policy benchmark.', 'as there are many ways such rules can be formulated and estimated, it is helpful to use a thick- modelling framework that reduces some of the data and model uncertainty.', 'such a framework currently suggests that the median rule points to a gradual dialling back of policy restriction (slide 7).', 'it also suggests that the distribution of projected interest rate outcomes is skewed to the upside.', 'the second benchmark is the natural real rate of interest, r*.', 'there is no consensus on what its main drivers are, or on how to best estimate it.', 'as a result, the range of estimates is exceptionally large, both within and across models.', 'recent analysis by ecb staff across a suite of models suggest that the point estimate of r* ranges from about -0.5% to 1%, or about 1.5% to 3% in nominal terms.', 'this is similar to recent estimates by economists from the bank for international settlements.', '©] significant parameter uncertainty makes it even more challenging to use the natural rate as a guidepost for monetary policy.', 'in this uncertain environment, it is helpful to focus on what has changed in recent years to understand whether real equilibrium rates could be higher today than during the 2010s.', 'an increase would warrant a more cautious approach by central banks removing policy restriction.', 'changes in the demand for and supply of global savings suggest that equilibrium rates may have increased in recent years.', "the pandemic, russia's invasion of ukraine and other shocks have led to an increase in public debt around the world (slide 8, left-hand side).", 'net borrowing by governments remains substantial.', 'in 2024, the public deficit will be around 5% of gdp across advanced economies and it is expected to decline only marginally in the coming years, also reflecting borrowing requirements associated with the digital and green transitions (slide 8, right-hand side).', 'the international monetary fund (imf) projects that, in the coming years, overall global investment - public and private - will reach the highest share in gdp since the 1980s.', 'it is likely that, as a result, real interest rates need to rise to clear the global market for savings.', 'this may especially be the case as rising geopolitical fragmentation contributes to reducing the supply of savings, including those provided by price-insensitive investors.', 'in the united states, for example, the decline in the share of foreign official holdings of us treasury securities has accelerated in recent years (slide 9, left-hand side).', 'it is now at the lowest level in more than twenty years.l2] incidentally, since about late 2022, asset swap spreads started to widen measurably in both the euro area and the united states, suggesting that investors are gradually demanding a higher return to warehouse the supply of global public bonds (slide 9, right-hand side).4 these developments are contributing to the reversal of the global savings glut, which put notable downward pressure on real rates for the greater part of the 21st century.)', 'this has repercussions for the assessment of the monetary policy stance.', 'for example, given the notable increase in real short-term rates expected to prevail in the distant future, which are often taken as proxies for the natural rate, the policy stance today may already be in neutral territory, as real spot rates have started to fall below their equilibrium levels (slide 10).', 'other indicators point in a similar direction.', 'in our most recent bank lending survey, for example, 93% of banks report that the general level of interest rates no longer plays a role in explaining weak loan demand.', 'this contrasts sharply with a year ago when almost half of the banks said that interest rates were a factor contributing to lower loan demand.', 'similarly, the survey on the access to finance of enterprises shows that the pressure from interest expenses is gradually easing.', 'the net percentage of firms indicating an increase in interest expenses fell from 36% to 19%, reaching similar levels to those recorded at the end of 2021. finally, among households, we have observed a notable turnaround in the demand for housing loans.', 'anet 39% of banks reported higher demand in the third quarter, a share close to the historical peak of 45% and well above the historical average (slide 11, left-hand side).', 'this increase in the demand for housing loans is broad-based across countries.', 'banks expect it to continue, reflecting both the decline in mortgage rates and improving housing market prospects.', 'in the second quarter, the euro area house price index rose for the first time in more than a year (slide 11, right-hand side).', 'return to price stability requires different conduct of monetary policy all this suggests that we should proceed with caution and remain data-dependent, assessing at each monetary policy meeting whether disinflation remains on track and whether, and to what extent, interest rates remain restrictive.', 'in doing so, we can continuously cross-check the assumptions underlying the staff projections and thereby retain a forward-looking perspective.', 'this is especially important at a time when past pandemic-related shocks are starting to recede, and new shocks are increasingly driving price and wage dynamics.', 'this shift in regime - from a high-inflation environment to one where inflation is consistent with price stability - has two important implications for the conduct of monetary policy.2] the effectiveness of monetary policy depends on the inflation regime one is that it has a direct impact on the effectiveness of monetary policy.', 'the success of central banks in paving the way towards restoring price stability after the recent inflation surge has a lot to do with how monetary policy works.', 'in a high-inflation regime, price increases tend to reflect factors common to most goods and services.', 'this is what has happened in recent years.', 'the common component of inflation rose sharply as firms reacted to the combination of higher energy prices, supply-side bottlenecks and pent-up demand after the pandemic-induced lockdowns.', 'this was reflected in the rapid broadening of inflation pressures across the goods and services contained in the consumption basket (slide 12).', 'ultimately, these shocks affected all sectors of the economy, especially when second-round effects pushed wage demands higher across firms.', 'wage-price spirals are often the clearest sign of a regime shift, when changes in the general price level become a coordination device for price and wage setters.', 'as monetary policy affects aggregate demand as well as the inflation expectations of both firms and households, it is powerful in counteracting such common shocks (slide 13, left-hand side).', 'as this process is nearing completion and we are re-entering a regime of price stability, idiosyncratic price shocks that reflect relative price changes, and that are mostly independent of each other, will again dominate in driving aggregate inflation.', 'this is reflected in the measurable decline of the common component.', 'idiosyncratic price changes, however, tend to be less responsive to changes in aggregate demand and hence to changes in monetary policy (slide 13, right-hand side).', 'as a result, monetary policy becomes less effective in steering overall inflation.', 'central banks then need to carefully weigh the benefits and costs of trying to lean against relative price shocks.', 'the strongest case for acting is when prices start to co-move again, either because of a new large shock or a series of shocks that move prices in the same direction.', 'but in the absence of such shocks, policy should be careful not to overreact.', 'this is especially the case if idiosyncratic shocks reflect structural forces.', 'while it is inherently difficult to separate cyclical from structural factors, surveys among firms suggest that a significant part of the current weakness in parts of our economy relates to forces outside the realm of monetary policy.', 'in our latest corporate telephone survey, for example, firms reported that the recent decline in business sentiment was driven by growing concerns about political developments, both in europe and globally, and waning competitiveness amid high energy costs and the green transition.', 'firms expressed concerns about rising regulatory costs, such as those resulting from the corporate sustainability reporting directive (csrd) or the corporate sustainability due diligence directive (csddd).', 'compliance with these and other directives is seen as complex and resource-intensive, especially for smaller firms.]', 'in other cases, such as the general data protection regulation (gdpr) or the artificial intelligence (al) act, there is mounting concern that regulation is increasingly stifling innovation and competition, especially in important areas such as al.', '[44] particularly in germany and france, these structural headwinds are causing businesses to postpone, or even refrain from, transformative investments and focus instead on efficiency and cost-cutting, which, in turn, is weighing on consumer confidence and spending.', 'an expansionary monetary policy stance will change this dynamic only marginally, if at all.', 'recent research by oscar jorda, sanjay singh and alan taylor corroborates this view.', 'it shows that, while the effects of tight monetary policy can be persistent, central banks cannot boost potential output by bringing rates into expansionary territory (slide 14, left-hand side).', 'and while the benefits of using monetary policy to deal with idiosyncratic shocks are likely to be limited, the welfare costs that it has for society can be significant.', 'one of the costs is that relative price adjustments support the efficient allocation of resources within the economy.', 'leaning too strongly against them in the absence of clear risks to price stability may inhibit this process.', 'the other is that valuable policy space is lost and so will not be available to support employment and growth when the economy faces shocks that monetary policy can deal with more effectively.', 'this was the case when the pandemic hit.', 'at that time, interest rates were already close to their effective lower bound.', 'as a result, central banks needed to resort to unconventional policy instruments.', 'however, the effectiveness of such measures in stimulating aggregate demand is more uncertain, while their potential side effects are larger."', 'greater tolerance for moderate deviations of inflation from target the second implication is that, when relative price shocks dominate, inflation is largely self-stabilising.', 'as a result, central banks can have a greater tolerance for moderate deviations of inflation from target, in both directions.', 'the reason is that the impact of changes in aggregate demand on inflation is weaker in an environment in which price changes are largely independent from each other.', 'that is, the phillips curve is highly non-linear: its slope is often steep when inflation is high, and it is flat when inflation is low.', "in this environment, it takes a large shock to aggregate demand for inflation to measurably and persistently drift away from the economy's nominal anchor - our 2% target.", 'so there is less need for policy to respond to moderate shocks.', 'this is especially true for disinflationary shocks.', 'overwhelming empirical evidence suggests that nominal wage cuts are extremely rare and that the frequency at which firms adjust prices lower is highly stable over time (slide 14, right-hand side).', '(48] and when prices and wages do not chase each other as they did over the past years, inflation is largely self-stabilising.', 'as such, the risk of falling into a truly harmful deflationary spiral is limited.', 'monetary policy can then be more patient and allow inflation to deviate from target for longer than in a situation in which risks of second-round effects are larger.', 'this can also be seen in the historical properties of commodity price shocks.', 'when oil prices fell sharply and persistently in 2014, the pass-through to consumer prices and wages was moderate.', 'underlying inflation, while weak, never fundamentally drifted away from our 2% target.', 'but in 2022, when inflation was already rising on the back of the repercussions of the pandemic, firms raised their prices considerably and much more frequently than when inflation was low and stable.', 'conclusion let me now conclude with three main take-aways.', 'first, price stability is within reach.', 'considering the risks and uncertainties we are still facing, lowering policy rates gradually towards a neutral level is the most appropriate course of action.', 'second, once price stability has been restored in a sustainable manner, the behaviour of inflation will change such that central banks can afford to tolerate moderate deviations of inflation from target, in both directions.', 'given limited policy space, monetary policy should focus on responding forcefully to shocks that have the capacity to destabilise inflation expectations by pushing inflation measurably and persistently away from our 2% target over the medium term.', 'third, monetary policy is not a supply-side instrument.', 'it cannot resolve structural issues that durably weigh on price pressures, as was the case during the 2010s, when a highly accommodative monetary policy stance over a long period was unable to lift the economy out of the low-growth, low-inflation environment.', 'structural policies are the responsibility of governments.', 'annexes 16 december 2024 presentation slides 1. bloom, n. (2009), "the impact of uncertainty shocks\', econometrica, vol.', '2. lagarde, c. (2024), "monetary policy in the euro area", speech at the bank of lithuania\'s annual economics conference on "pillars of resilience amid global geopolitical shifts", on the occasion of the 10th anniversary of euro introduction, vilnius, lithuania, 16 december.', '3. choraria, n. (2024), inflation trading, goldman sachs international, 9 november.', '4. ecb (2024), eurosystem staff macroeconomic projections for the euro area, june.', '5. european commission, ets2: buildings, road transport and additional sectors.', '6. eurobarometer, november 2024.', '7. brand, c., lisack, n. and mazelis, f. (2024), "estimates of the natural interest rate for the euro area: an update", economic bulletin, issue 1, ecb.', '8. benigno, g., hofmann, b., nufio, g. and sandri, d. (2024), "quo vadis, r*?', 'the natural rate of interest after the pandemic", b/s quarterly review, march.', "9. this has coincided with the price of gold - the world's other safe haven asset - having more than doubled over the past ten years.", '10. real rates could rise more substantially if investors were to regard government bonds as less safe, pushing equilibrium risk premia higher.', 'analysis by the imf, for example, suggests that if the premia were to rise back to pre-2000 average levels, they could bring up natural rates in advanced economies by 70 basis points.', 'see imf (2023), "the natural rate of interest: drivers and policy implications\', world economic outlook, april.', '(2005), the global saving glut and the u.s. current account deficit", remarks at the sandridge lecture, virginia association of economists, richmond, virginia, 10 march.', '12. this part of the speech builds on insights contained in borio, c., lombardi, m., yetman, j. and zakrajsek, e. (2023), "the two-regime view of inflation\', bis papers, no 133.', "13. for instance, mario draghi's report on the future of european competitiveness presented estimates of the costs for complying with the corporate sustainability reporting directive ranging from €150,000 for non-listed businesses to €1 million for listed companies.", 'also, according to the 2024 european investment bank survey, nearly a third of small and medium-sized firms report that more than 10% of their staff are employed to assess and comply with regulatory requirements and standards.', '14. goldberg, s. (2023), "balancing act: protecting privacy, protecting competition", stanford institute for economic policy research, policy brief, january; gal, m. and aviv, o.', '(2020), "the competitive effects of the gdpr\'", journal of competition law & economics, vol.', '349-391; and chivot, e. and castro, d. (2019), the eu needs to reform the gdpr to remain competitive in the algorithmic economy, center for data innovation, 13 may.', '15. jorda, o., singh, s. and taylor, a.', '(2020), "the long-run effects of monetary policy", nber working paper, no 26666.', '(2024), "the benefits and costs of asset purchases", speech at the 2024 boj-imes conference on "price dynamics and monetary policy challenges: lessons learned and going forward", tokyo, 28 may; and schnabel, i.', '(2024), "reassessing monetary policy tools in a volatile macroeconomic environment", speech at the 25th jacques polak annual research conference, washington, d.c., 14 november.', '17. benigno, p. and eggertsson, g. (2023), "it\'s baaack: the surge in inflation in the 2020s and the return of the non-linear phillips curve", nber working paper, no 31197. see also hooper, p., mishkin, f.s.', '(2019), "prospects for inflation in a high pressure economy: is the phillips curve dead or is it just hibernating?', '", nber working paper, no 25792.', '18. more recent contributions are grigsby, j., hurst, e. and yildirmaz, a.', '(2021), "aggregate nominal wage adjustments: new evidence from administrative payroll data\', american economic review, vol.', '111, no 2, pp.', '428-471 and schaefer, d. and singleton, c. (2023), "the extent of downward nominal wage rigidity: new evidence from payroll data\', review of economic dynamics, vol.', '19. lagarde (2024, op.cit.).']
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Isabel Schnabel
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European Central Bank
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Member of the Executive Board
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European Central Bank
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https://www.bis.org/review/r241218d.htm
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Claudia Buch: Results of the 2024 Supervisory Review and Evaluation Process (SREP) and the supervisory priorities for 2025-27
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Introductory statement by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the press conference on the 2024 Supervisory Review and Evaluation Process (SREP) results and the supervisory priorities for 2025-27, Frankfurt am Main, 17 December 2024.
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2024-12-17 00:00:00
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SPEECH
Introductory statement
Speech by Claudia Buch, Chair of the Supervisory Board of the
ECB, at the press conference on the 2024 SREP results and the
supervisory priorities for 2025-27
Frankfurt am Main, 17 December 2024
Jump to the transcript of the questions and answers
Introduction
Let me welcome you to my first press conference as the Chair of the Supervisory Board of the ECB.
This year marks the tenth anniversary of the Single Supervisory Mechanism, which provides a good
opportunity to reflect upon what we have achieved so far and what we can improve on.
Over the past decade, European banking supervision has contributed to the increased resilience of
European banks and thus to financial stability. The results of the annual Supervisory Review and
Evaluation Process (SREP) for 2024, which we have published today, show that the banks directly
supervised by the ECB generally have strong fundamentals. The asset quality of European banks is
robust, they have overall solid capital positions, good levels of profitability, and are a reliable source of
funding and financial services for European households and firms.
Looking ahead, banks will need to adapt to a changing environment. Faced with heightened
geopolitical risks, structural change, climate and environmental risks, and downside risks to the
macroeconomic outlook, strong financial and operational resilience will remain key. Corporate
insolvencies are on the increase, potentially leading to higher credit risk. The public sector may have
more limited capacity than in the past to buffer adverse shocks. The digitalisation of financial services
is changing the competitive landscape. Banks must therefore remain vigilant and prudent to sustain
their business and operations. Their currently good levels of profitability provide them with an
opportunity to strengthen their resilience.
Against this background, the current SREP cycle has not resulted in major changes to banks' SREP
scores or overall Pillar 2 requirements in aggregate terms. The annual Supervisory Review and
Evaluation Process assesses each bank's risks, business model viability and resilience. Where we
identify shortcomings, supervisory measures are put in place that ensure remediation by the banks.
Banks' individual SREP scores and Pillar 2 requirements take bank-specific risks into account.
The supervisory priorities for the years 2025-27 continue to focus on risks related to macro-financial
threats and geopolitical shocks, as well as on challenges stemming from the digital transformation,
while emphasising the need to remediate shortcomings, particularly those related to governance and
risk management.
This year, we have taken a large step forward to make ECB Banking Supervision more efficient and
effective. We have launched a comprehensive reform of the SREP to respond to emerging risks in a
more targeted way, to simplify, and to reduce complexity. The reform will be implemented over the next
two years.
Overall resilience of the banking system
Let me provide an overview of the resilience of the European banking system.
Chart 1: CET1 capital and leverage ratios of significant institutions
18%
CET1 ratio
16%
14% mer
12%
10%
8%
Leverage ratio
6% a ee ee
4%
2%
0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: ECB supervisory banking statistics.
Banks directly supervised by the ECB have overall solid capital and liquidity positions, which is a
significant improvement compared with the situation ten years ago.) The aggregate Common Equity
Tier 1 (CET1) ratio stood at 15.8% in mid-2024, which is a slight improvement compared with the
previous year. Similarly, the leverage ratio increased slightly to 5.8%.
Chart 2: Distribution of capital headroom between CET1 capital ratios and CET1
overall requirements and Pillar 2 guidance after 2024 SREP
100
90
80
70
60
50 Projected
Current
40
30
20 I
: a)
a I
<0% [0-0.5%) [0.5-1%) [1-2%) [2-5%) [5-10%) >10%
Capital headroom (%)
Number of institutions
oO
oO
Sources: ECB supervisory banking statistics and SREP database.
Notes: Projected capital headroom is based on the 2024 SREP decisions and will be applied in 2025; current
capital headroom is based on the 2023 SREP decisions and applicable in 2024. Pillar 2 CET1 requirements and
Pillar 2 guidance are as per the published list of Pillar 2 requirements applicable as of the first quarter of 2025.
CET1 ratios are as at the second quarter of 2024. For systemic buffers (global systemically important institutions,
other systemically important institutions and systemic risk buffers) and the countercyclical capital buffer, the levels
shown are those anticipated for the first quarter of 2025 and included in 2024 CET1 requirements and guidance.
CET1 ratios have been adjusted for AT1/T2 shortfalls.
Capital headroom compared with overall capital requirements has remained broadly stable on the
previous year. Next year, 85% of institutions are expected to have capital headroom of over 200 basis
points; only a few are projected to have capital headroom below 100 basis points.
Chart 3: Liquidity ratios
180%
170%
Liquidity coverage ratio
160%
150%
140%
130% Net stable funding ratio
120%
110%
100%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: ECB supervisory banking statistics.
Overall liquidity conditions have remained favourable. After the ECB started a period of quantitative
tightening, banks turned smoothly to the markets to meet their financing needs. The share of funding
through deposits remained largely stable. Generally, banks have good access to retail and wholesale
funding. Yet some banks need to better prepare for an environment with potentially tighter liquidity
conditions. This is the result of targeted reviews of banks' funding plans, of their capabilities to
mobilise collateral and of their asset and liability management.
Chart 4: Non-performing loans by counterparty sector
9% 9%
8% 8%
7% 7%
6% 6%
5% 5%
4% NPL ratio forloanstoNFCs 4%
3% 3% NPL ratio for loans to households
2% 2%
1% 1%
0% 0%
2020 2021 2022 2023 2024 2020 2021 2022 2023 2024
9% 9%
8% 8%
7% 7%
6% 6%
5% 5%
4% = : : 4% of which small and medium-sized
of which collateralised by commercial enterprises
3% immovable property 3%
2% 2%
1% 1%
0% 0%
2020 = 2021 2022 2023 2024 2020 2021 2022 2023 2024
Source: ECB supervisory banking statistics.
Note: "NFC" stands for "non-financial corporations".
The quality of banks' assets has remained strong. The ratio of non-performing loans to total loans has
remained around 2.2% over the last two years and is close to historical lows. 2] However, there are
initial signs of weakening asset quality driven by exposures to commercial real estate and small and
medium-sized enterprises (SMEs), the latter accounting for about 50% of European banks' lending
portfolios. Non-performing loans are rising in Austria and Germany, and to a lesser extent in France,
albeit from very low levels.
Low levels of credit risk reflect the strong fundamentals of households and firms but also stem partly
from the public support during the COVID-19 pandemic and the energy crises. Generally, the debt
sustainability of households is benefiting from a strong labour market, rising wages and decreasing
levels of indebtedness. Corporate balance sheets and profitability have generally remained resilient in
2024, thanks also to declining input and energy costs.
Chart 5: Insolvencies and real GDP in the euro area-4
10% 30,000
25,000
5% 7
20,000 =
= €
: DUadh ah i
DS » re}
- \ evant m 5000 f
8 \ 3
= o
Qa
& 10.000 §
-5% -
5,000
10% I
0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Sources: Eurostat and national statistics.
Notes: The series is based on developments in Germany, Spain, France and Italy (euro area-4).
Insolvencies are shown as the average number of firms per quarter within each year. Real GDP is the 4-quarter
moving sum growth rate. The latest observation is for the second quarter of 2024.
But pockets of vulnerabilities are emerging, reflecting higher borrowing costs, weaker growth and
structural changes in the real economy. Even during the pandemic, when GDP declined, corporate
insolvencies fell. Since mid-2022, however, corporate insolvencies have been on the rise, signalling a
potential future deterioration in asset quality.
Chart 6: Return on equity and return on assets
12% 1.2%
Return on equity (Ihs)
10% 1.0%
8% 0.8%
6% 0.6%
Return on assets
4% (ths) 0.4%
2% 0.2%
0% 0.0%
2016 2017 2018 2019 2020 2021 2022 2023 = =2024
Source: ECB supervisory banking statistics.
Bank profitability has remained strong, with an annualised return on equity of 10.1% in mid-2024.
Higher interest rates are a key driver: during the low interest rate environment, banks' average return
on equity was 5.5%; following the normalisation of interest rates, it increased to 9.2%.) in addition,
the average cost-to-income ratio declined from 66% in 2020 to 54% in 2024. Cost of risk has remained
muted.
Chart 7: Aggregate net interest margin
1.7%
1.6%
1.5%
1.4%
1.3%
1.2%
1.1% = -xo TTS
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: ECB supervisory banking statistics.
Chart 8: Share of fixed versus variable rate lending to non-financial corporations
LT
So
=
@ Fixed
© Mixed
@ Variable
10%
20%
30%
40%
50%
60%
70%
80%
90%
=
o
ao
2
70
Source: ECB (2024), Financial Stability Review, May.
Notes: Lending shares refer to outstanding amounts for loans to non-financial corporations. "Fixed" indicates a
rate that both parties to the loan contract agree to at inception. "Variable" indicates a rate linked to an exogenous
parameter (e.g. EURIBOR). "Mixed" indicates a combination of fixed and variable rates.
Aggregate net interest margins have widened across euro area banks. In countries where floating rate
loan contracts prevail, the pass-through of higher interest rates has been relatively fast. In countries
where fixed rate loan contracts are more common, the impact of higher interest rates on profitability
and borrower default risks has been delayed. On the funding side, shifts from demand to term deposits
with higher interest rates have so far been relatively slow. Variations in the pass-through also reflect
differences in banks' pricing power across countries. Cross-border competition in deposit taking is
particularly limited, with only around 1.6% of deposits held across borders.!4]
Banks' distribution plans foresee a relatively stable aggregate payout ratio. Supervised banks expect
to pay out 49% of profits for 2024 or one percentage point less than in the previous year. Share
buybacks have become less prominent, representing a little less than one-quarter of distributions
compared with one-third a year ago.
The future performance of banks will depend on the economic outlook, their resilience to adverse
shocks, shifts in the yield curve and interest rate pass-through. Banks' ability to contain costs while
investing in the digitalisation of their business models will be crucial to sustain profitability. Distribution
plans thus need to be aligned with sufficiently forward-looking capital plans that also consider relevant
adverse scenarios.
Risk outlook and supervisory responses
From a macroeconomic perspective, the year 2024 has been characterised by a resilient euro area
economy, which is projected to grow at a rate of 0.7%./5] But the short and medium-term outlook for
growth remains subdued and subject to considerable uncertainty. The likelihood of tail events
materialising appears higher than a year ago. Geopolitical tensions alongside growing deglobalisation
trends could push energy prices and freight costs higher in the short term and disrupt global trade.
Our supervisory priorities reflect this risk outlook.
Chart 9: Measures of uncertainty in the euro area
Political uncertainty
Systemic stress
2k
2007 2009 2011 2013 2015 2017 2019 2021 2023
Sources: ECB, policyuncertainty.com and ECB staff calculations.
Notes: The composite indicator of systemic stress (CISS) and the economic policy uncertainty index are monthly
data series (standardised by the standard deviation from the mean over the period January 1999-December
2019). A value of 2 should be read as meaning that the uncertainty measure exceeds its historical average level
by two standard deviations. The latest observations are for November 2024.
Heightened geopolitical risks affect banks through various channels. Adverse geopolitical events are
often not priced in by financial markets, which can lead to an abrupt repricing of risks if such events
materialise. Financial sanctions and cyberattacks can affect banks, including through outsourcing
arrangements. In terms of the real economy, higher costs for firms and disruptions to global trade
could increase credit risk.
Credit risk management therefore remains a priority for ECB Banking Supervision. Novel risks may not
be adequately captured by risk models that are based on past data. Accounting overlays are thus one
instrument that can be used to address novel risks in a forward-looking way. From our supervisory
perspective, we are therefore addressing deficiencies in IFRS 9 accounting frameworks in terms of
identifying and monitoring risk.
To address the deterioration in asset quality, we have carried out targeted reviews on commercial and
residential real estate as well as SME portfolios, and we are taking supervisory measures where we
have identified weaknesses. To provide transparency on our risk assessment methodologies, today we
are publishing a comprehensive supervisory methodology for assessing interest rate risk and credit
spread risk in the banking book.
To deal with heightened risks and uncertainties, banks' decision-making bodies need reliable
information. Over the years, however, we have identified ongoing deficiencies in risk data aggregation
and risk reporting. These deficiencies prevent management from receiving timely and comprehensive
information on relevant risks and they also increase the cost of responding to supervisory requests. At
the ECB, we have therefore intensified our efforts to encourage banks to improve their information
systems and address IT security and cyber risks.
More generally, banks need to speed up their digitalisation efforts. SREP scores for operational and
ICT risk remain among the worst. We are therefore focusing on addressing outsourcing risks and
enhancing banks' cyber resilience, also taking into account the Digital Operational Resilience Act,
which comes into force in 2025. This year, we conducted a cyber resilience stress test to assess
banks' ability to respond to cyber incidents. The stress test showed that banks are prepared, but it also
revealed areas for improvement in cybersecurity.
Moreover, climate-related and environmental risks are increasingly relevant and continue to be a
significant concern. Banks need to fully account for transition and physical risks. They have started to
make progress in integrating these risks into their governance and risk management frameworks,
addressing our supervisory expectations. However, we found that some banks were still lacking key
elements needed to adequately manage climate and environmental risks, prompting further
supervisory actions.
2024 SREP assessment
Let me now turn to this year's SREP assessment, which was carried out against the backdrop of the
risk outlook I have just described.
Chart 10: Overall SREP scores
35%
30% 2024 SREP
3+ 3 3- 4
Source: ECB SREP database.
Notes: 2022 SREP values are based on assessments of 101 banks, 2023 SREP values are based on
assessments of 106 banks, and 2024 SREP values are based on assessments of 104 banks. There were no
banks with an overall SREP score of 1 in 2022, 2023 or 2024.
2023 SREP
25%
2022 SREP
20%
15%
10%
5%
0% ieee
O+
The average overall SREP score in 2024 remained stable at 2.6, with 74% of banks scoring the
same as last year. 11% of banks saw their scores worsen, mainly because of their exposure to the
commercial real estate sector and interest rate risk, while 15% of banks achieved a better score,
mainly because of increased profitability.
This year's SREP resulted in more binding measures to address severe weaknesses. This reflects our
increased focus on ensuring that supervised banks remediate any findings in a timely manner. More
specifically, we imposed the following quantitative and qualitative supervisory measures.
Chart 11: Evolution of overall capital requirements and Pillar 2 guidance - the total
capital stack
@ Pillar 1 requirements CET1 M@ Systemic risk buffers CET1
© Pillar 1 requirements AT1+T2 @ Countercyclical capital buffer CET1
@ Pillar 2 requirements CET1 @ Pillar 2 guidance CET1
®@ Pillar 2 requirements AT1+T2 = Overall capital requirements and guidance
tm Capital conservation buffer CET1
18% 15.6%
0,
16% 14.8% 14.5% 14.7% 15.1% 19.5% ""
14%
12%
10%
8%
6%
4%
2%
0%
2020 2021 2022 2023 2024 2025
Sources: ECB supervisory banking statistics and SREP database.
Notes: The sample selection follows the approach taken in the methodological note for the supervisory banking
statistics. For 2020 the first quarter sample is based on 112 entities; for 2021 the first quarter sample is based on
114 entities; for 2022 the first quarter sample is based on 112 entities; for 2023 the first quarter sample is based
on 111 entities; and for 2024 the first quarter sample is based on 110 entities. For 2025 the first quarter sample is
based on 109 entities, with the Pillar 2 requirement (P2R) being applicable from January 2025. The chart shows
RWA-weighted data from the second quarter of 2024. "Overall capital requirements" comprise the Pillar 1
minimum requirement, the Pillar 2 requirement, combined buffer requirements (i.e. the capital conservation buffer
and systemic buffers (global systemically important institutions, other systemically important institutions and
systemic risk buffers) and the countercyclical capital buffer). Rounding differences may apply. The reference
period for the combined buffer requirement is the first quarter of each year. For the first quarter of 2025 buffers are
estimated based on announced rates applicable at this date. Estimated values are shown with a lighter colour and
marked with an asterisk. The Pillar 2 guidance is added on top of the overall capital requirements. Under CRD V,
which came into effect on 1 January 2021, the P2R capital should have the same composition as Pillar 1 - i.e. at
least 56.25% should fall under CET1 capital and at least 75% should fall under Tier 1 capital, in line with the
minimum requirements. By way of derogation from the first sub-paragraph of paragraph 4, Article 104a CRD V,
the competent authority may require an institution to meet its additional own funds requirements with a higher
share of Tier 1 capital or CET1 capital, where necessary, and considering the specific circumstances of the
institution.
In terms of quantitative requirements, the overall CET1 capital requirements and guidance stand at
11.3% of risk-weighted assets, compared with 11.2% last year. Overall capital requirements and Pillar
2 guidance have thus increased slightly.'2] Changes in the risk profiles of individual banks led to three
types of Pillar 2 add-ons being applied.
> For nine banks, an average add-on of 14 basis points addresses excessive risk arising from
leveraged finance.
> For 18 banks, an average add-on of 5 basis points addresses shortfalls in the coverage of non-
performing exposures.
> For 13 banks, an add-on of between 10 and 40 basis points was applied to the leverage ratio
requirement.
Quantitative liquidity measures were issued for four banks.
Qualitative measures were issued for 95 banks, mainly to address deficiencies in the areas of credit
risk management, internal governance and capital adequacy.
The stability of the banks' SREP scores reflects, on the one hand, an improvement in key risk
indicators and, on the other hand, the high degree of uncertainty concerning the economic outlook. We
have therefore taken a number of measures to ensure that banks assess risks in a sufficiently forward-
looking way. These include supervisory focus on capital and liquidity planning that takes relevant
adverse scenarios into account; on provisioning frameworks that capture novel risks; on operational
resilience, particularly in relation to cyber and outsourcing risks; and on stress tests that capture
geopolitical risks.
Microprudential supervision needs to be complemented by a strong macroprudential framework.
Releasable macroprudential buffers in the banking union have in fact increased in recent years: the
weighted average rate for countercyclical capital buffers and (sectoral) systemic risk buffers rose from
about 0.3% at the end of 2019 to 0.8% in mid-2024 5] We very much welcome the progress made in
this area in addressing uncertainties and risks to financial stability.
Supervisory priorities
Figure 1: Supervisory priorities
Priority 1: Banks should strengthen their ability to withstand immediate macro-financial threats and severe geopolitical
shocks
Address deficiencies in credit risk management frameworks lt) Credit risk
Address deficiencies in operational resilience frameworks as regards IT Operational risk
outsourcing and IT security/cyber risks ose SI
Special focus: Incorporating the management of geopolitical risks in OSS yee Te
supervisory priorities P 9
Priority 2: Banks should remedy persistent material shortcomings in an effective and timely manner
Address deficiencies in business strategies and risk management as regards Climate-related and
climate-related and environmental risks environmental risks
Address deficiencies in risk data aggregation and reporting & Governance
Priority 3: Banks should strengthen their digitalisation strategies and tackle emerging challenges stemming from the use
of new technologies
Address deficiencies in digital transformation strategies © Business model
Our supervisory priorities for the years 2025-27 continue to focus on external challenges for banks,
while putting greater emphasis on remediating persistent shortcomings.
First, resilience to macro-financial threats and geopolitical shocks requires the attention of banks'
boards and senior management. Improving credit risk management and maintaining adequate levels
of provisioning remain important for financial resilience, while increased IT and cybersecurity risks
require adequate governance structures and sufficient investment.
Second, banks need to address shortcomings related to governance, climate-related and
environmental risk management and risk data aggregation and reporting capabilities. We will continue
to monitor these areas and take supervisory action as necessary.
And third, risks associated with digitalisation require adequate safeguards. We will continue to assess
banks' digital strategies to ensure that risks are mitigated, and we are publishing an updated SREP
methodology for operational and ICT risk today.
SREP reform
Just like the banks, supervisors have to respond to changes in the external environment. During its
first decade, ECB Banking Supervision has become an internationally recognised supervisor,
delivering on its mandate. But our supervisory procedures have become complex, potentially impairing
our ability to react to new developments in a timely manner.
The SREP reform that we announced earlier this year will make our supervision more efficient, more
effective and more intrusive. We will sharpen the focus on bank-specific risks, better integrate different
supervisory activities and communicate more clearly with banks. We will use our full supervisory toolkit
to ensure that findings are remediated more promptly. We will make methodologies more stable to
achieve greater consistency. And investing in advanced IT and analytics will simplify data submissions,
while enabling us to provide more tailored and timely feedback to banks.
These reforms will be fully implemented by 2026, and we will carefully monitor their impact.
Conclusion
Chart 12: Consolidated gross debt of the non-financial private sector in the euro area
== Total debt (consolidated) tm Debt securities
tm Loans from MFIs M@ Other loans
@ Loans from non-MFls
@ Loans from rest of the world
160%
140%
a. 120%
a
© 100%
80%
60%
% of nominal
40%
20%
0%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Sources: Eurostat, ECB and ECB calculations.
Notes: MFI" stands for "monetary financial institutions. Consolidated gross debt is defined as total gross debt
minus loans granted by firms and households. The latest observations are for the second quarter of 2024.
Let me conclude. European banks have overall strong fundamentals in terms of their asset quality,
capitalisation and profitability. This contributes to financial stability and the provision of financial
services to households and firms across the banking union. Bank loans remain a key source of
funding to the real economy, while non-bank financial intermediaries have grown in importance.
Looking ahead, heightened uncertainty will require a high level of prudence. Banks' ability to maintain
robust business models depends on their resilience to shocks and their ability to adapt to the new
environment, particularly the digitalisation of finance. Sound profitability enables banks to further
strengthen their resilience and to remain a reliable foundation for the euro area economy, including
during periods of stress.
As supervisors, we will continue to focus on the resilience of European banks. Weakening standards
of supervision would weaken banks, making it harder for them to support the real economy and
compete successfully. At the same time, we need to ensure that our supervision is as efficient and
effective as possible. This is the aim of our SREP reform, which will also bring benefits for the banks
we supervise.
We in ECB Banking Supervision rely on strong support from policymakers and regulators to achieve
our goals. Completing the banking union and capital markets union, rather than relaxing banking rules
or delaying the implementation of Basel Ill, is critical to enhancing financial stability and fostering
economic growth. Decisive action would further bolster our capacity to cope with future shocks
effectively.
Thank you very much for your attention. I now look forward to your questions.
kK
Two questions from my side. The first on "efficient and effective". As you redeploy resources -
you have spoken a lot about geopolitical risk - as you focus more on that, what are you
focusing less on? And I ask this question also with respect to banks complaining about rising
demands from supervisors. What are you giving them an easier ride on at the same time?
And then the other question on significant risk transfers [SRTs], I mean the capital relief type. I
was wondering if you could confirm that you now will be shortening the period that banks have
to apply in advance to get these. Why are you doing that? I assume it's because you like SRTs?
And if you have any words of warning to banks on this front? I'm thinking specifically about
leverage employed to buy SRTs, so whether risk is not actually leaving the financial system,
but is getting more and more complicated.
Thank you for these very good questions, which allow me to explain a bit more what we are doing with
the Supervisory Review and Evaluation Process [SREP] reform to become more efficient and
effective. So first of all, very simply speaking, what it does is that we are giving more flexibility to the
Joint Supervisory Teams, to the supervisors, to adjust their supervisory action to the risks being faced
and that are most relevant for the specific bank. So we have overall risks and priorities that are being
defined by the Supervisory Board, but then of course the relevance of specific risks might be very
different for different types of banks. So, the teams have more flexibility. It's not that they ignore certain
types of risk, but rather say: what is really relevant for this bank? What do we need to focus on? We
have a risk tolerance framework that allows the teams to actually do this, and they can also spread out
their risk assessment over a three-year period. We have a multi-year approach so that not every risk
needs to be looked at with the same intensity in each year for each bank. So we become more
targeted - this is our role, this is also how we define good supervision - we become more targeted to
the relevant risks.
You also mentioned: is there an ever-rising demand of supervisory requests? No, there isn't. The
demand of supervisory requests is again linked to the risks that we see, because this is our role: to
keep European banks safe and stable. And if the environment changes, if climate and environmental
risks are relevant and not fully addressed by the banks, we need to react to that. If the geopolitical risk
environment changes, then we need to address the risks that are relevant for the specific banks. Of
course, we also need to do this in an efficient and effective way. So what we will do even more in the
future is use what we call integrated planning, so that all our activities - whether they are horizontal
across different banks or vertical for specific banks - are integrated even more closely and can also
inform each other, so that we don't have to duplicate certain types of activities. But it's very important
for us that we address the relevant risks that are there and don't lose relevant risks out of sight. And
the teams have more flexibility now. By the way, the risk tolerance framework, the multi-year approach,
has already been in place since 2023, but we are rolling it out now more forcefully and we monitor the
progress being made.
As to your second question on the significant risk transfers, this is related obviously to securitisation
and we generally think that securitisation can be a useful instrument to move risks to the part of the
financial system where they can be better borne than on banks' balance sheets. But at the same time,
of course, we need to make sure that there are no spillover effects on the banking sector - this is a bit
the second part of your question. So who's financing these significant risk transfers and could there be
amplification effects in the financial system? Of course, we need to monitor this very closely.
Now, within this framework that we have and also within the regulatory framework that we have, there
was actually room for improvement, and this is what you mentioned. In terms of, for a given risk
transfer, can we speed up the process until we approve a certain significant risk transfer? And here we
have worked with the European Banking Federation to get a pilot started. Of course, we need some
products for which we can run the pilot. We will do this next year and then hopefully speed up our
efforts - to the benefit of us, because less resources will go into that, and also to the benefit of the
industry. But let me reassure you, we will never lose resilience out of sight. This is given a certain risk
that is being transferred and we will also carefully monitor the effects on the financial system, because
this is mainly about efficiency - it's not about weakening resilience.
Question one: how exactly shall banks consider geopolitical risks? It's a very broad term and I
would like to have an idea what the banks specifically should do about it.
The other question is a little bit more specific. It's on the recalibration of the SREP. Deutsche
Bank, whose Pillar 2 requirement [P2R] has increased, suggested that their higher Pillar 2
requirement is due to the recalibration of your SREP and it would have nothing to do with any
reassessment of the riskiness of Deutsche Bank. So is this view or description of Deutsche
Bank accurate? So can I imagine that you don't see Deutsche Bank as more risky, but
nevertheless the Pillar 2 requirement can increase?
Thank you very much for the first question on geopolitical risk, which is indeed an issue about which
we have been thinking hard to get to some extent a conceptual framework around it, because different
people may have different understandings of what geopolitical risk is actually about. What we have
done is we've published our way of thinking about this in September this year, and the main idea is
that geopolitical risk is not a new risk category for the banks. It's affecting the banks through credit risk,
market risk, operational risk. But there are dimensions of this risk which you wouldn't cover if you
didn't think about it in terms of the geopolitical environment. And here it's relatively broad, i
|
['speech introductory statement speech by claudia buch, chair of the supervisory board of the ecb, at the press conference on the 2024 srep results and the supervisory priorities for 2025-27 frankfurt am main, 17 december 2024 jump to the transcript of the questions and answers introduction let me welcome you to my first press conference as the chair of the supervisory board of the ecb.', 'this year marks the tenth anniversary of the single supervisory mechanism, which provides a good opportunity to reflect upon what we have achieved so far and what we can improve on.', 'over the past decade, european banking supervision has contributed to the increased resilience of european banks and thus to financial stability.', 'the results of the annual supervisory review and evaluation process (srep) for 2024, which we have published today, show that the banks directly supervised by the ecb generally have strong fundamentals.', 'the asset quality of european banks is robust, they have overall solid capital positions, good levels of profitability, and are a reliable source of funding and financial services for european households and firms.', 'looking ahead, banks will need to adapt to a changing environment.', 'faced with heightened geopolitical risks, structural change, climate and environmental risks, and downside risks to the macroeconomic outlook, strong financial and operational resilience will remain key.', 'corporate insolvencies are on the increase, potentially leading to higher credit risk.', 'the public sector may have more limited capacity than in the past to buffer adverse shocks.', 'the digitalisation of financial services is changing the competitive landscape.', 'banks must therefore remain vigilant and prudent to sustain their business and operations.', 'their currently good levels of profitability provide them with an opportunity to strengthen their resilience.', "against this background, the current srep cycle has not resulted in major changes to banks' srep scores or overall pillar 2 requirements in aggregate terms.", "the annual supervisory review and evaluation process assesses each bank's risks, business model viability and resilience.", 'where we identify shortcomings, supervisory measures are put in place that ensure remediation by the banks.', "banks' individual srep scores and pillar 2 requirements take bank-specific risks into account.", 'the supervisory priorities for the years 2025-27 continue to focus on risks related to macro-financial threats and geopolitical shocks, as well as on challenges stemming from the digital transformation, while emphasising the need to remediate shortcomings, particularly those related to governance and risk management.', 'this year, we have taken a large step forward to make ecb banking supervision more efficient and effective.', 'we have launched a comprehensive reform of the srep to respond to emerging risks in a more targeted way, to simplify, and to reduce complexity.', 'the reform will be implemented over the next two years.', 'overall resilience of the banking system let me provide an overview of the resilience of the european banking system.', 'chart 1: cet1 capital and leverage ratios of significant institutions 18% cet1 ratio 16% 14% mer 12% 10% 8% leverage ratio 6% a ee ee 4% 2% 0% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 source: ecb supervisory banking statistics.', 'banks directly supervised by the ecb have overall solid capital and liquidity positions, which is a significant improvement compared with the situation ten years ago.)', 'the aggregate common equity tier 1 (cet1) ratio stood at 15.8% in mid-2024, which is a slight improvement compared with the previous year.', 'similarly, the leverage ratio increased slightly to 5.8%.', 'chart 2: distribution of capital headroom between cet1 capital ratios and cet1 overall requirements and pillar 2 guidance after 2024 srep 100 90 80 70 60 50 projected current 40 30 20 i : a) a i <0% [0-0.5%) [0.5-1%) [1-2%) [2-5%) [5-10%) >10% capital headroom (%) number of institutions oo oo sources: ecb supervisory banking statistics and srep database.', 'notes: projected capital headroom is based on the 2024 srep decisions and will be applied in 2025; current capital headroom is based on the 2023 srep decisions and applicable in 2024. pillar 2 cet1 requirements and pillar 2 guidance are as per the published list of pillar 2 requirements applicable as of the first quarter of 2025. cet1 ratios are as at the second quarter of 2024. for systemic buffers (global systemically important institutions, other systemically important institutions and systemic risk buffers) and the countercyclical capital buffer, the levels shown are those anticipated for the first quarter of 2025 and included in 2024 cet1 requirements and guidance.', 'cet1 ratios have been adjusted for at1/t2 shortfalls.', 'capital headroom compared with overall capital requirements has remained broadly stable on the previous year.', 'next year, 85% of institutions are expected to have capital headroom of over 200 basis points; only a few are projected to have capital headroom below 100 basis points.', 'chart 3: liquidity ratios 180% 170% liquidity coverage ratio 160% 150% 140% 130% net stable funding ratio 120% 110% 100% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 source: ecb supervisory banking statistics.', 'overall liquidity conditions have remained favourable.', 'after the ecb started a period of quantitative tightening, banks turned smoothly to the markets to meet their financing needs.', 'the share of funding through deposits remained largely stable.', 'generally, banks have good access to retail and wholesale funding.', 'yet some banks need to better prepare for an environment with potentially tighter liquidity conditions.', "this is the result of targeted reviews of banks' funding plans, of their capabilities to mobilise collateral and of their asset and liability management.", 'chart 4: non-performing loans by counterparty sector 9% 9% 8% 8% 7% 7% 6% 6% 5% 5% 4% npl ratio forloanstonfcs 4% 3% 3% npl ratio for loans to households 2% 2% 1% 1% 0% 0% 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 9% 9% 8% 8% 7% 7% 6% 6% 5% 5% 4% = : : 4% of which small and medium-sized of which collateralised by commercial enterprises 3% immovable property 3% 2% 2% 1% 1% 0% 0% 2020 = 2021 2022 2023 2024 2020 2021 2022 2023 2024 source: ecb supervisory banking statistics.', 'note: "nfc" stands for "non-financial corporations".', "the quality of banks' assets has remained strong.", 'the ratio of non-performing loans to total loans has remained around 2.2% over the last two years and is close to historical lows.', "2] however, there are initial signs of weakening asset quality driven by exposures to commercial real estate and small and medium-sized enterprises (smes), the latter accounting for about 50% of european banks' lending portfolios.", 'non-performing loans are rising in austria and germany, and to a lesser extent in france, albeit from very low levels.', 'low levels of credit risk reflect the strong fundamentals of households and firms but also stem partly from the public support during the covid-19 pandemic and the energy crises.', 'generally, the debt sustainability of households is benefiting from a strong labour market, rising wages and decreasing levels of indebtedness.', 'corporate balance sheets and profitability have generally remained resilient in 2024, thanks also to declining input and energy costs.', 'chart 5: insolvencies and real gdp in the euro area-4 10% 30,000 25,000 5% 7 20,000 = = € : duadh ah i ds » re} - \\ evant m 5000 f 8 \\ 3 = o qa & 10.000 § -5% - 5,000 10% i 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 sources: eurostat and national statistics.', 'notes: the series is based on developments in germany, spain, france and italy (euro area-4).', 'insolvencies are shown as the average number of firms per quarter within each year.', 'real gdp is the 4-quarter moving sum growth rate.', 'the latest observation is for the second quarter of 2024. but pockets of vulnerabilities are emerging, reflecting higher borrowing costs, weaker growth and structural changes in the real economy.', 'even during the pandemic, when gdp declined, corporate insolvencies fell.', 'since mid-2022, however, corporate insolvencies have been on the rise, signalling a potential future deterioration in asset quality.', 'chart 6: return on equity and return on assets 12% 1.2% return on equity (ihs) 10% 1.0% 8% 0.8% 6% 0.6% return on assets 4% (ths) 0.4% 2% 0.2% 0% 0.0% 2016 2017 2018 2019 2020 2021 2022 2023 = =2024 source: ecb supervisory banking statistics.', 'bank profitability has remained strong, with an annualised return on equity of 10.1% in mid-2024.', "higher interest rates are a key driver: during the low interest rate environment, banks' average return on equity was 5.5%; following the normalisation of interest rates, it increased to 9.2%.)", 'in addition, the average cost-to-income ratio declined from 66% in 2020 to 54% in 2024. cost of risk has remained muted.', 'chart 7: aggregate net interest margin 1.7% 1.6% 1.5% 1.4% 1.3% 1.2% 1.1% = -xo tts 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 source: ecb supervisory banking statistics.', 'chart 8: share of fixed versus variable rate lending to non-financial corporations lt so = @ fixed © mixed @ variable 10% 20% 30% 40% 50% 60% 70% 80% 90% = o ao 2 70 source: ecb (2024), financial stability review, may.', 'notes: lending shares refer to outstanding amounts for loans to non-financial corporations.', '"fixed" indicates a rate that both parties to the loan contract agree to at inception.', '"variable" indicates a rate linked to an exogenous parameter (e.g.', '"mixed" indicates a combination of fixed and variable rates.', 'aggregate net interest margins have widened across euro area banks.', 'in countries where floating rate loan contracts prevail, the pass-through of higher interest rates has been relatively fast.', 'in countries where fixed rate loan contracts are more common, the impact of higher interest rates on profitability and borrower default risks has been delayed.', 'on the funding side, shifts from demand to term deposits with higher interest rates have so far been relatively slow.', "variations in the pass-through also reflect differences in banks' pricing power across countries.", 'cross-border competition in deposit taking is particularly limited, with only around 1.6% of deposits held across borders.', "!4] banks' distribution plans foresee a relatively stable aggregate payout ratio.", 'supervised banks expect to pay out 49% of profits for 2024 or one percentage point less than in the previous year.', 'share buybacks have become less prominent, representing a little less than one-quarter of distributions compared with one-third a year ago.', 'the future performance of banks will depend on the economic outlook, their resilience to adverse shocks, shifts in the yield curve and interest rate pass-through.', "banks' ability to contain costs while investing in the digitalisation of their business models will be crucial to sustain profitability.", 'distribution plans thus need to be aligned with sufficiently forward-looking capital plans that also consider relevant adverse scenarios.', 'risk outlook and supervisory responses from a macroeconomic perspective, the year 2024 has been characterised by a resilient euro area economy, which is projected to grow at a rate of 0.7%./5] but the short and medium-term outlook for growth remains subdued and subject to considerable uncertainty.', 'the likelihood of tail events materialising appears higher than a year ago.', 'geopolitical tensions alongside growing deglobalisation trends could push energy prices and freight costs higher in the short term and disrupt global trade.', 'our supervisory priorities reflect this risk outlook.', 'chart 9: measures of uncertainty in the euro area political uncertainty systemic stress 2k 2007 2009 2011 2013 2015 2017 2019 2021 2023 sources: ecb, policyuncertainty.com and ecb staff calculations.', 'notes: the composite indicator of systemic stress (ciss) and the economic policy uncertainty index are monthly data series (standardised by the standard deviation from the mean over the period january 1999-december 2019).', 'a value of 2 should be read as meaning that the uncertainty measure exceeds its historical average level by two standard deviations.', 'the latest observations are for november 2024. heightened geopolitical risks affect banks through various channels.', 'adverse geopolitical events are often not priced in by financial markets, which can lead to an abrupt repricing of risks if such events materialise.', 'financial sanctions and cyberattacks can affect banks, including through outsourcing arrangements.', 'in terms of the real economy, higher costs for firms and disruptions to global trade could increase credit risk.', 'credit risk management therefore remains a priority for ecb banking supervision.', 'novel risks may not be adequately captured by risk models that are based on past data.', 'accounting overlays are thus one instrument that can be used to address novel risks in a forward-looking way.', 'from our supervisory perspective, we are therefore addressing deficiencies in ifrs 9 accounting frameworks in terms of identifying and monitoring risk.', 'to address the deterioration in asset quality, we have carried out targeted reviews on commercial and residential real estate as well as sme portfolios, and we are taking supervisory measures where we have identified weaknesses.', 'to provide transparency on our risk assessment methodologies, today we are publishing a comprehensive supervisory methodology for assessing interest rate risk and credit spread risk in the banking book.', "to deal with heightened risks and uncertainties, banks' decision-making bodies need reliable information.", 'over the years, however, we have identified ongoing deficiencies in risk data aggregation and risk reporting.', 'these deficiencies prevent management from receiving timely and comprehensive information on relevant risks and they also increase the cost of responding to supervisory requests.', 'at the ecb, we have therefore intensified our efforts to encourage banks to improve their information systems and address it security and cyber risks.', 'more generally, banks need to speed up their digitalisation efforts.', 'srep scores for operational and ict risk remain among the worst.', "we are therefore focusing on addressing outsourcing risks and enhancing banks' cyber resilience, also taking into account the digital operational resilience act, which comes into force in 2025. this year, we conducted a cyber resilience stress test to assess banks' ability to respond to cyber incidents.", 'the stress test showed that banks are prepared, but it also revealed areas for improvement in cybersecurity.', 'moreover, climate-related and environmental risks are increasingly relevant and continue to be a significant concern.', 'banks need to fully account for transition and physical risks.', 'they have started to make progress in integrating these risks into their governance and risk management frameworks, addressing our supervisory expectations.', 'however, we found that some banks were still lacking key elements needed to adequately manage climate and environmental risks, prompting further supervisory actions.', "2024 srep assessment let me now turn to this year's srep assessment, which was carried out against the backdrop of the risk outlook i have just described.", 'chart 10: overall srep scores 35% 30% 2024 srep 3+ 3 3- 4 source: ecb srep database.', 'notes: 2022 srep values are based on assessments of 101 banks, 2023 srep values are based on assessments of 106 banks, and 2024 srep values are based on assessments of 104 banks.', 'there were no banks with an overall srep score of 1 in 2022, 2023 or 2024.', '2023 srep 25% 2022 srep 20% 15% 10% 5% 0% ieee o+ the average overall srep score in 2024 remained stable at 2.6, with 74% of banks scoring the same as last year.', '11% of banks saw their scores worsen, mainly because of their exposure to the commercial real estate sector and interest rate risk, while 15% of banks achieved a better score, mainly because of increased profitability.', "this year's srep resulted in more binding measures to address severe weaknesses.", 'this reflects our increased focus on ensuring that supervised banks remediate any findings in a timely manner.', 'more specifically, we imposed the following quantitative and qualitative supervisory measures.', 'chart 11: evolution of overall capital requirements and pillar 2 guidance - the total capital stack @ pillar 1 requirements cet1 m@ systemic risk buffers cet1 © pillar 1 requirements at1+t2 @ countercyclical capital buffer cet1 @ pillar 2 requirements cet1 @ pillar 2 guidance cet1 ®@ pillar 2 requirements at1+t2 = overall capital requirements and guidance tm capital conservation buffer cet1 18% 15.6% 0, 16% 14.8% 14.5% 14.7% 15.1% 19.5% "" 14% 12% 10% 8% 6% 4% 2% 0% 2020 2021 2022 2023 2024 2025 sources: ecb supervisory banking statistics and srep database.', 'notes: the sample selection follows the approach taken in the methodological note for the supervisory banking statistics.', 'for 2020 the first quarter sample is based on 112 entities; for 2021 the first quarter sample is based on 114 entities; for 2022 the first quarter sample is based on 112 entities; for 2023 the first quarter sample is based on 111 entities; and for 2024 the first quarter sample is based on 110 entities.', 'for 2025 the first quarter sample is based on 109 entities, with the pillar 2 requirement (p2r) being applicable from january 2025. the chart shows rwa-weighted data from the second quarter of 2024.', '"overall capital requirements" comprise the pillar 1 minimum requirement, the pillar 2 requirement, combined buffer requirements (i.e.', 'the capital conservation buffer and systemic buffers (global systemically important institutions, other systemically important institutions and systemic risk buffers) and the countercyclical capital buffer).', 'rounding differences may apply.', 'the reference period for the combined buffer requirement is the first quarter of each year.', 'for the first quarter of 2025 buffers are estimated based on announced rates applicable at this date.', 'estimated values are shown with a lighter colour and marked with an asterisk.', 'the pillar 2 guidance is added on top of the overall capital requirements.', 'under crd v, which came into effect on 1 january 2021, the p2r capital should have the same composition as pillar 1 - i.e.', 'at least 56.25% should fall under cet1 capital and at least 75% should fall under tier 1 capital, in line with the minimum requirements.', 'by way of derogation from the first sub-paragraph of paragraph 4, article 104a crd v, the competent authority may require an institution to meet its additional own funds requirements with a higher share of tier 1 capital or cet1 capital, where necessary, and considering the specific circumstances of the institution.', 'in terms of quantitative requirements, the overall cet1 capital requirements and guidance stand at 11.3% of risk-weighted assets, compared with 11.2% last year.', 'overall capital requirements and pillar 2 guidance have thus increased slightly.', "'2] changes in the risk profiles of individual banks led to three types of pillar 2 add-ons being applied.", '> for nine banks, an average add-on of 14 basis points addresses excessive risk arising from leveraged finance.', '> for 18 banks, an average add-on of 5 basis points addresses shortfalls in the coverage of non- performing exposures.', '> for 13 banks, an add-on of between 10 and 40 basis points was applied to the leverage ratio requirement.', 'quantitative liquidity measures were issued for four banks.', 'qualitative measures were issued for 95 banks, mainly to address deficiencies in the areas of credit risk management, internal governance and capital adequacy.', "the stability of the banks' srep scores reflects, on the one hand, an improvement in key risk indicators and, on the other hand, the high degree of uncertainty concerning the economic outlook.", 'we have therefore taken a number of measures to ensure that banks assess risks in a sufficiently forward- looking way.', 'these include supervisory focus on capital and liquidity planning that takes relevant adverse scenarios into account; on provisioning frameworks that capture novel risks; on operational resilience, particularly in relation to cyber and outsourcing risks; and on stress tests that capture geopolitical risks.', 'microprudential supervision needs to be complemented by a strong macroprudential framework.', 'releasable macroprudential buffers in the banking union have in fact increased in recent years: the weighted average rate for countercyclical capital buffers and (sectoral) systemic risk buffers rose from about 0.3% at the end of 2019 to 0.8% in mid-2024 5] we very much welcome the progress made in this area in addressing uncertainties and risks to financial stability.', 'supervisory priorities figure 1: supervisory priorities priority 1: banks should strengthen their ability to withstand immediate macro-financial threats and severe geopolitical shocks address deficiencies in credit risk management frameworks lt) credit risk address deficiencies in operational resilience frameworks as regards it operational risk outsourcing and it security/cyber risks ose si special focus: incorporating the management of geopolitical risks in oss yee te supervisory priorities p 9 priority 2: banks should remedy persistent material shortcomings in an effective and timely manner address deficiencies in business strategies and risk management as regards climate-related and climate-related and environmental risks environmental risks address deficiencies in risk data aggregation and reporting & governance priority 3: banks should strengthen their digitalisation strategies and tackle emerging challenges stemming from the use of new technologies address deficiencies in digital transformation strategies © business model our supervisory priorities for the years 2025-27 continue to focus on external challenges for banks, while putting greater emphasis on remediating persistent shortcomings.', "first, resilience to macro-financial threats and geopolitical shocks requires the attention of banks' boards and senior management.", 'improving credit risk management and maintaining adequate levels of provisioning remain important for financial resilience, while increased it and cybersecurity risks require adequate governance structures and sufficient investment.', 'second, banks need to address shortcomings related to governance, climate-related and environmental risk management and risk data aggregation and reporting capabilities.', 'we will continue to monitor these areas and take supervisory action as necessary.', 'and third, risks associated with digitalisation require adequate safeguards.', "we will continue to assess banks' digital strategies to ensure that risks are mitigated, and we are publishing an updated srep methodology for operational and ict risk today.", 'srep reform just like the banks, supervisors have to respond to changes in the external environment.', 'during its first decade, ecb banking supervision has become an internationally recognised supervisor, delivering on its mandate.', 'but our supervisory procedures have become complex, potentially impairing our ability to react to new developments in a timely manner.', 'the srep reform that we announced earlier this year will make our supervision more efficient, more effective and more intrusive.', 'we will sharpen the focus on bank-specific risks, better integrate different supervisory activities and communicate more clearly with banks.', 'we will use our full supervisory toolkit to ensure that findings are remediated more promptly.', 'we will make methodologies more stable to achieve greater consistency.', 'and investing in advanced it and analytics will simplify data submissions, while enabling us to provide more tailored and timely feedback to banks.', 'these reforms will be fully implemented by 2026, and we will carefully monitor their impact.', 'conclusion chart 12: consolidated gross debt of the non-financial private sector in the euro area == total debt (consolidated) tm debt securities tm loans from mfis m@ other loans @ loans from non-mfls @ loans from rest of the world 160% 140% a.', '120% a © 100% 80% 60% % of nominal 40% 20% 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 sources: eurostat, ecb and ecb calculations.', 'notes: mfi" stands for "monetary financial institutions.', 'consolidated gross debt is defined as total gross debt minus loans granted by firms and households.', 'the latest observations are for the second quarter of 2024. let me conclude.', 'european banks have overall strong fundamentals in terms of their asset quality, capitalisation and profitability.', 'this contributes to financial stability and the provision of financial services to households and firms across the banking union.', 'bank loans remain a key source of funding to the real economy, while non-bank financial intermediaries have grown in importance.', 'looking ahead, heightened uncertainty will require a high level of prudence.', "banks' ability to maintain robust business models depends on their resilience to shocks and their ability to adapt to the new environment, particularly the digitalisation of finance.", 'sound profitability enables banks to further strengthen their resilience and to remain a reliable foundation for the euro area economy, including during periods of stress.', 'as supervisors, we will continue to focus on the resilience of european banks.', 'weakening standards of supervision would weaken banks, making it harder for them to support the real economy and compete successfully.', 'at the same time, we need to ensure that our supervision is as efficient and effective as possible.', 'this is the aim of our srep reform, which will also bring benefits for the banks we supervise.', 'we in ecb banking supervision rely on strong support from policymakers and regulators to achieve our goals.', 'completing the banking union and capital markets union, rather than relaxing banking rules or delaying the implementation of basel ill, is critical to enhancing financial stability and fostering economic growth.', 'decisive action would further bolster our capacity to cope with future shocks effectively.', 'thank you very much for your attention.', 'i now look forward to your questions.', 'kk two questions from my side.', 'the first on "efficient and effective".', 'as you redeploy resources - you have spoken a lot about geopolitical risk - as you focus more on that, what are you focusing less on?', 'and i ask this question also with respect to banks complaining about rising demands from supervisors.', 'what are you giving them an easier ride on at the same time?', 'and then the other question on significant risk transfers [srts], i mean the capital relief type.', 'i was wondering if you could confirm that you now will be shortening the period that banks have to apply in advance to get these.', 'why are you doing that?', "i assume it's because you like srts?", 'and if you have any words of warning to banks on this front?', "i'm thinking specifically about leverage employed to buy srts, so whether risk is not actually leaving the financial system, but is getting more and more complicated.", 'thank you for these very good questions, which allow me to explain a bit more what we are doing with the supervisory review and evaluation process [srep] reform to become more efficient and effective.', 'so first of all, very simply speaking, what it does is that we are giving more flexibility to the joint supervisory teams, to the supervisors, to adjust their supervisory action to the risks being faced and that are most relevant for the specific bank.', 'so we have overall risks and priorities that are being defined by the supervisory board, but then of course the relevance of specific risks might be very different for different types of banks.', 'so, the teams have more flexibility.', "it's not that they ignore certain types of risk, but rather say: what is really relevant for this bank?", 'what do we need to focus on?', 'we have a risk tolerance framework that allows the teams to actually do this, and they can also spread out their risk assessment over a three-year period.', 'we have a multi-year approach so that not every risk needs to be looked at with the same intensity in each year for each bank.', 'so we become more targeted - this is our role, this is also how we define good supervision - we become more targeted to the relevant risks.', 'you also mentioned: is there an ever-rising demand of supervisory requests?', 'the demand of supervisory requests is again linked to the risks that we see, because this is our role: to keep european banks safe and stable.', 'and if the environment changes, if climate and environmental risks are relevant and not fully addressed by the banks, we need to react to that.', 'if the geopolitical risk environment changes, then we need to address the risks that are relevant for the specific banks.', 'of course, we also need to do this in an efficient and effective way.', "so what we will do even more in the future is use what we call integrated planning, so that all our activities - whether they are horizontal across different banks or vertical for specific banks - are integrated even more closely and can also inform each other, so that we don't have to duplicate certain types of activities.", "but it's very important for us that we address the relevant risks that are there and don't lose relevant risks out of sight.", 'and the teams have more flexibility now.', 'by the way, the risk tolerance framework, the multi-year approach, has already been in place since 2023, but we are rolling it out now more forcefully and we monitor the progress being made.', "as to your second question on the significant risk transfers, this is related obviously to securitisation and we generally think that securitisation can be a useful instrument to move risks to the part of the financial system where they can be better borne than on banks' balance sheets.", 'but at the same time, of course, we need to make sure that there are no spillover effects on the banking sector - this is a bit the second part of your question.', "so who's financing these significant risk transfers and could there be amplification effects in the financial system?", 'of course, we need to monitor this very closely.', 'now, within this framework that we have and also within the regulatory framework that we have, there was actually room for improvement, and this is what you mentioned.', 'in terms of, for a given risk transfer, can we speed up the process until we approve a certain significant risk transfer?', 'and here we have worked with the european banking federation to get a pilot started.', 'of course, we need some products for which we can run the pilot.', 'we will do this next year and then hopefully speed up our efforts - to the benefit of us, because less resources will go into that, and also to the benefit of the industry.', 'but let me reassure you, we will never lose resilience out of sight.', "this is given a certain risk that is being transferred and we will also carefully monitor the effects on the financial system, because this is mainly about efficiency - it's not about weakening resilience.", 'question one: how exactly shall banks consider geopolitical risks?', "it's a very broad term and i would like to have an idea what the banks specifically should do about it.", 'the other question is a little bit more specific.', "it's on the recalibration of the srep.", 'deutsche bank, whose pillar 2 requirement [p2r] has increased, suggested that their higher pillar 2 requirement is due to the recalibration of your srep and it would have nothing to do with any reassessment of the riskiness of deutsche bank.', 'so is this view or description of deutsche bank accurate?', "so can i imagine that you don't see deutsche bank as more risky, but nevertheless the pillar 2 requirement can increase?", 'thank you very much for the first question on geopolitical risk, which is indeed an issue about which we have been thinking hard to get to some extent a conceptual framework around it, because different people may have different understandings of what geopolitical risk is actually about.', "what we have done is we've published our way of thinking about this in september this year, and the main idea is that geopolitical risk is not a new risk category for the banks.", "it's affecting the banks through credit risk, market risk, operational risk.", "but there are dimensions of this risk which you wouldn't cover if you didn't think about it in terms of the geopolitical environment.", "and here it's relatively broad, i"]
|
Claudia Buch
|
European Central Bank
|
Chair of the Supervisory Board
|
Germany
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https://www.bis.org/review/r241218h.htm
|
Gabriel Makhlouf: Protecting consumers
|
Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the publication of the OECD review of the Central Bank of Ireland's consumer protection supervisory functions, Dublin, 16 December 2024.
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2024-12-16 00:00:00
|
Gabriel Makhlouf: Protecting consumers
Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the
publication of the OECD review of the Central Bank of Ireland's consumer protection
supervisory functions, Dublin, 16 December 2024.
* * *
Thank you and welcome to this special event to mark the publication of the OECD's
report on the Central Bank's financial consumer protection role.
This is the first review of its kind by the OECD and, given our shared commitment to
financial consumer protection, we at the Central Bank are very pleased to be a pioneer
in this work with you. We put ourselves forward for this review as we welcome the
opportunity for our work to be assessed against global standards by an independent,
objective third party. And we are very conscious of the OECD's central role in
establishing the global standards through the G20/OECD High-Level Principles on
Financial Consumer Protection.
Consumer protection is at the heart of everything we do in the Central Bank, aligned to
our constant and predominant aim being the welfare of the people as a whole. Over the
last decade, we have, alongside other public institutions, played a significant role in
strengthening the consumer protection framework in Ireland, to ensure that our system
and protections are in line with those global standards.
While this strengthening of the framework has improved supports and outcomes for
consumers, we also recognise the importance of ensuring that the framework - like all
frameworks - continues to adapt and evolve so that it remains fit for purpose and
futureready.
The challenges and risks facing us are clear. The global economy is fragmenting and
countries across the globe are undergoing significant economic transitions - in
demography, in technology, in climate - while also experiencing a period of
unprecedented innovation. Consumers are adapting and in the face of a changing
ecosystem, central banks, regulators, and businesses have to adapt, evolve and
transform as well. The value provided by the OECD, given their knowledge of how
countries and regulators across the globe are facing into these challenges, is clear.
For our part, we are changing how we work and ensuring our frameworks reflect an
increasingly digital world. As the financial services sector evolves, so too must our
approach to supervision and regulation to ensure it remains fit for purpose. This need to
adapt, evolve and transform is at the core of our Strategy.
A key element of this is the work we are finalising on our review of the Consumer
Protection Code to ensure it is future-ready. As I have said before, "the Code is a
cornerstone of consumer protection in financial services in Ireland, establishing a set of
rules and expectations for how firms should treat their customers and has allowed the
Central Bank to intervene to protect consumers." The changes we have proposed build
on the existing Code, reflecting the provision of financial services in a digital world.
We have had very active and important engagement with stakeholders on the Code,
with feedback coming through from across industry, civil society and other government
agencies and regulators, as well as from the Minister for Finance. The feedback we
have received has been broadly positive with many stakeholders welcoming the
proposals.
We are aiming to publish the revised Code early in the New Year. When implemented,
consumers will benefit from a package of protections that reflect how they are
accessing financial services today. Regulated firms will benefit from a clearer
articulation of their Code obligations.
As you know, we are also making changes to our supervisory model, which we will
begin to implement in January. The new model remains risk-based, but is evolving to
deliver a more integrated approach drawing on all elements of our mandate (consumer
and investor protection, safety and soundness, financial stability and integrity of the
system).
This enhanced approach is based on accumulated experience, on insight, on best
practice and is built for a faster moving and more complex financial services sector.
Firms will hear one consistent voice from the Bank, with more coordinated messaging
and more streamlined demands across the full span of our regulatory and supervisory
mandate.
We will promote a more open and transparent supervisory approach. To enable and
implement our new supervisory framework we need the right operational approach and
organisational structure. We are moving to an organisational structure where our
regulatory and supervisory directorates will have teams responsible for integrated
supervision across all our regulatory outcomes.
Importantly, our supervisory model will place consumer protection at the heart of
day-today supervision. It will position us better as an organisation to meet our objectives to
ensure consumers of financial services are protected in this changing financial
landscape, as highlighted by the OECD report.
This is why this review by the OECD is so important, as it provides us with
recommendations and insights that will support our ambition to transform and will be
incorporated into our transformed supervisory approach.
The OECD's assessment that the Central Bank is operating in line with the High Level
Principles is very positive. We also welcome the recommendations on how we can
further enhance our approach, in particular the insights on international best practice
and peer comparisons, which we will consider carefully. I very much welcome the
OECD's focus on how we can further strengthen the way in which we engage with and
listen to consumers, the way in which we provide them with information, and ultimately
how we measure our effectiveness in terms of outcomes.
We know that engaging with consumers, listening to them and hearing their views and
perspectives will also support an important part of our vision, to build and maintain trust
in the Central Bank. We know that trust is fundamental to allow central banks and other
public institutions to be effective. Without the trust of the public that it serves, an
institution will struggle to function and I especially welcome that the OECD has
recognised this link in many of its recommendations.
The implementation of the OECD recommendations will sit alongside our new
regulatory and supervisory framework and the new Consumer Protection Code and
ensure regulated firms are operating under a modernised set of rules and approaches
as we face into the challenges of a changing global economy.
Let me conclude with three particular thank yous.
First, to the various organisations and representative groups that met with the OECD
and provided important insights and perspectives to inform and support the review
team's analysis. It is good to see so many of you here. We value and appreciate your
contributions, not just to this review but throughout our broader engagements and
discussions.
Second, to the OECD and its review team for carrying out this important piece of work.
It reinforces our commitment to continuous improvement and our openness to learning.
And third, to Derville Rowland, Colm Kincaid and everyone involved in consumer
protection at the Central Bank for ensuring we continue to deliver on our constant and
predominant aim in a rapidly-changing world.
|
["gabriel makhlouf: protecting consumers remarks by mr gabriel makhlouf, governor of the central bank of ireland, at the publication of the oecd review of the central bank of ireland's consumer protection supervisory functions, dublin, 16 december 2024.", "* * * thank you and welcome to this special event to mark the publication of the oecd's report on the central bank's financial consumer protection role.", 'this is the first review of its kind by the oecd and, given our shared commitment to financial consumer protection, we at the central bank are very pleased to be a pioneer in this work with you.', 'we put ourselves forward for this review as we welcome the opportunity for our work to be assessed against global standards by an independent, objective third party.', "and we are very conscious of the oecd's central role in establishing the global standards through the g20/oecd high-level principles on financial consumer protection.", 'consumer protection is at the heart of everything we do in the central bank, aligned to our constant and predominant aim being the welfare of the people as a whole.', 'over the last decade, we have, alongside other public institutions, played a significant role in strengthening the consumer protection framework in ireland, to ensure that our system and protections are in line with those global standards.', 'while this strengthening of the framework has improved supports and outcomes for consumers, we also recognise the importance of ensuring that the framework - like all frameworks - continues to adapt and evolve so that it remains fit for purpose and futureready.', 'the challenges and risks facing us are clear.', 'the global economy is fragmenting and countries across the globe are undergoing significant economic transitions - in demography, in technology, in climate - while also experiencing a period of unprecedented innovation.', 'consumers are adapting and in the face of a changing ecosystem, central banks, regulators, and businesses have to adapt, evolve and transform as well.', 'the value provided by the oecd, given their knowledge of how countries and regulators across the globe are facing into these challenges, is clear.', 'for our part, we are changing how we work and ensuring our frameworks reflect an increasingly digital world.', 'as the financial services sector evolves, so too must our approach to supervision and regulation to ensure it remains fit for purpose.', 'this need to adapt, evolve and transform is at the core of our strategy.', 'a key element of this is the work we are finalising on our review of the consumer protection code to ensure it is future-ready.', 'as i have said before, "the code is a cornerstone of consumer protection in financial services in ireland, establishing a set of rules and expectations for how firms should treat their customers and has allowed the central bank to intervene to protect consumers."', 'the changes we have proposed build on the existing code, reflecting the provision of financial services in a digital world.', 'we have had very active and important engagement with stakeholders on the code, with feedback coming through from across industry, civil society and other government agencies and regulators, as well as from the minister for finance.', 'the feedback we have received has been broadly positive with many stakeholders welcoming the proposals.', 'we are aiming to publish the revised code early in the new year.', 'when implemented, consumers will benefit from a package of protections that reflect how they are accessing financial services today.', 'regulated firms will benefit from a clearer articulation of their code obligations.', 'as you know, we are also making changes to our supervisory model, which we will begin to implement in january.', 'the new model remains risk-based, but is evolving to deliver a more integrated approach drawing on all elements of our mandate (consumer and investor protection, safety and soundness, financial stability and integrity of the system).', 'this enhanced approach is based on accumulated experience, on insight, on best practice and is built for a faster moving and more complex financial services sector.', 'firms will hear one consistent voice from the bank, with more coordinated messaging and more streamlined demands across the full span of our regulatory and supervisory mandate.', 'we will promote a more open and transparent supervisory approach.', 'to enable and implement our new supervisory framework we need the right operational approach and organisational structure.', 'we are moving to an organisational structure where our regulatory and supervisory directorates will have teams responsible for integrated supervision across all our regulatory outcomes.', 'importantly, our supervisory model will place consumer protection at the heart of day-today supervision.', 'it will position us better as an organisation to meet our objectives to ensure consumers of financial services are protected in this changing financial landscape, as highlighted by the oecd report.', 'this is why this review by the oecd is so important, as it provides us with recommendations and insights that will support our ambition to transform and will be incorporated into our transformed supervisory approach.', "the oecd's assessment that the central bank is operating in line with the high level principles is very positive.", 'we also welcome the recommendations on how we can further enhance our approach, in particular the insights on international best practice and peer comparisons, which we will consider carefully.', "i very much welcome the oecd's focus on how we can further strengthen the way in which we engage with and listen to consumers, the way in which we provide them with information, and ultimately how we measure our effectiveness in terms of outcomes.", 'we know that engaging with consumers, listening to them and hearing their views and perspectives will also support an important part of our vision, to build and maintain trust in the central bank.', 'we know that trust is fundamental to allow central banks and other public institutions to be effective.', 'without the trust of the public that it serves, an institution will struggle to function and i especially welcome that the oecd has recognised this link in many of its recommendations.', 'the implementation of the oecd recommendations will sit alongside our new regulatory and supervisory framework and the new consumer protection code and ensure regulated firms are operating under a modernised set of rules and approaches as we face into the challenges of a changing global economy.', 'let me conclude with three particular thank yous.', "first, to the various organisations and representative groups that met with the oecd and provided important insights and perspectives to inform and support the review team's analysis.", 'it is good to see so many of you here.', 'we value and appreciate your contributions, not just to this review but throughout our broader engagements and discussions.', 'second, to the oecd and its review team for carrying out this important piece of work.', 'it reinforces our commitment to continuous improvement and our openness to learning.', 'and third, to derville rowland, colm kincaid and everyone involved in consumer protection at the central bank for ensuring we continue to deliver on our constant and predominant aim in a rapidly-changing world.']
|
Gabriel Makhlouf
|
Central Bank of Ireland
|
Governor
|
Ireland
|
https://www.bis.org/review/r241218g.htm
|
Rajeshwar Rao: Strengthening the Insolvency and Bankruptcy Code (IBC) framework for effective resolution
|
Inaugural address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the International Conclave, jointly organised by the Insolvency and Bankruptcy Board of India (IBBI) and INSOL India, New Delhi, 7 December 2024.
|
2024-12-07 00:00:00
|
Rajeshwar Rao: Strengthening the Insolvency and Bankruptcy Code
(IBC) framework for effective resolution
Inaugural address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of
India, at the International Conclave, jointly organised by the Insolvency and Bankruptcy
Board of India (IBBI) and INSOL India, New Delhi, 7 December 2024.
* * *
Good Morning Ladies and Gentlemen.
At the outset, I would like to thank Shri Ravi Mital, Chairperson, Insolvency and
Bankruptcy Board of India for inviting me to this international conclave on the theme
'Insolvency Resolution: Evolution & Global Perspective' being held in collaboration with
INSOL India. A confluence in the thought processes of policy makers, practitioners and
academicians would perhaps help to shape an objective assessment of the resolution &
insolvency regime in the country. This should then enable us to chart out a future path
for the resolution processes to make it more effective and efficient.
Today, let me begin by reflecting on the role of Insolvency and Bankruptcy Code (IBC)
in cleaning up of banks' balance sheets and on the possible ways we could further
leverage its potential for the key stakeholders from our perspective, viz. the financial
creditors. The present insolvency and bankruptcy regime in India was the outcome of
the suggestions made by the Bankruptcy Law Reforms Committee headed by Dr. T K
Viswanathan. The Committee's recommendations for the new insolvency and
bankruptcy resolution system were based on a few core principles namely (i) facilitating
the assessment of viability of the enterprise at an early stage; (ii) enabling symmetry of
information between creditors and debtors;(iii) ensuring a time-bound process to better
preserve economic value; (iv) respecting the rights of all creditors, with clarity on
priority; and (v) ensuring finality of outcomes.
The outcome of the action on these recommendations was the Insolvency and
Bankruptcy Code (IBC) of 2016. The code and its related ecosystem have continued to
evolve since then, effectively advancing the principles mentioned above. However, its
implementation being a function of the broader ecosystem in which it operates, the
code has faced various criticisms in its relatively short existence, particularly regarding
delays in meeting timelines and unsatisfactory recovery rates, partly due to the
misaligned incentives amongst the stakeholders. While several amendments have been
made to the IBC since its introduction to address some of these concerns, challenges
persist.
Role of IBC in cleaning up of bank balance sheets
As you are aware, asset quality position of the banking system has shown a remarkable
improvement over the past few years - specifically, the gross NPAs of the scheduled
commercial banks have declined from the peak of 11.2% in March 2018 to 2.8% in
1
March 2024 . A good part of that reduction is attributable to resolution processes
enabled under IBC. If an overall assessment of IBC is made, it shows a significant level
2
of traction as a resolution mechanism. As of September 2024, 8,002 cases have been
admitted into the Corporate Insolvency Resolution Process (CIRP) and approximately
75% of these cases were closed through resolution, withdrawal, review, settlement, or
liquidation. Of the closed cases, 56% were either resolved, settled, or withdrawn. In a
positive trend, the ratio of resolutions to liquidations has risen from 21% in 2017-18 to
61% in 2023-24. In addition to facilitating resolution outcomes, the IBC has also been
effectively used by both financial and operational creditors to encourage borrowers to
repay their debts. By March 2024, 28,818 cases involving an outstanding default
amount of 10.22 lakh crore were withdrawn prior to admission.
In terms of the powers vested under newly inserted Section 35AA of the Banking
Regulation Act, RBI had issued directions to banks in 2017 in respect of 41 entities,
which accounted for more than 35% of the banking system NPAs at that point, for filing
CIRP applications. So far, resolution plan has been approved in the case of 17
3
borrowers , orders of liquidation have been issued in the case of 12 borrowers,
settlement was reached by lenders with 2 borrowers; and in 4 cases the lenders have
assigned their exposures to ARCs. The aggregate realisation for financial creditors from
the 17 resolved cases has been around 50% of admitted claims and 190% of liquidation
value.
Financial creditors are now actively leveraging the Code for resolution of stressed
assets. As of September 2024, around 633 corporate debtors, where insolvency
application was initiated by financial creditors, have been successfully resolved under
IBC, yielding an average realization of 30.09% of admitted claims. Further, CIRP
applications filed by financial creditors in 702 corporate debtor accounts have been
either resolved through appeal/review/settlement or withdrawn under section 12A.
Similarly, liquidation orders have been passed in respect of 1224 corporate debtors.
Moreover, the operationalisation of section 227 of the code in 2019 empowered
Reserve Bank to leverage the IBC mechanism for resolution of Financial Service
Providers (FSPs). Reserve Bank has used this avenue for initiating insolvency
proceedings against four FSPs so far and all of them have been successfully resolved
as on date. Evidentially, IBC seems to have played a significant role in cleaning up the
bank balance sheets.
Although the IBC has proven to be a valuable tool for creditors, its full potential has
been realized only to a limited extent. Let me elaborate on some of the factors that have
constrained its effectiveness to give a clearer understanding of why the IBC's potential
has not been fully harnessed.
(i) Delay in initiation
Time and Timing are both crucial for the effectiveness of the resolution process. While
delays within the IBC process have been widely discussed, an equally important issue
is the delay in initiating the IBC process itself. The IBC grants all creditors the right to
initiate the CIRP upon default. However, in practice, the average time taken by financial
creditors from the date of default to the filing of the CIRP is often several months. A
significant amount of value is lost during this period, which ultimately impacts the
recovery outcome. In this context, the role of financial creditors is vital-they must take
prompt action to prevent further value erosion.
While IBC has gained prominence of late, we need to realise that it is just one amongst
the host of mechanisms available for creditors to resolve financial stress. There are
other statutory mechanisms for enforcing security, as well as out-of-court workout
options for resolution, each with its own role and limitations. From a regulatory
perspective, the Reserve Bank remains neutral regarding the mechanisms chosen by
lenders, as long as the actions are initiated in a timely manner so as to facilitate the
prompt resolution of financial distress.
(ii) Efficacy of out of court workouts
The real success of a formal insolvency framework lies in its role as a deterrent than
based on its actual use. It is out of court workout procedures that need to work as the
primary instruments of resolution, albeit under the shadow of the formal insolvency
framework. In the Indian context, the RBI's Prudential Framework on Resolution of
Stressed Assets provides a viable out of court workout mechanism. This Prudential
Framework provides a broad principle-based regime for early recognition of stress and
time-bound resolution by the lenders. However, the efficacy of this mechanism has
been constrained on account of several factors, including issues with coordination
among lenders. What is therefore required is a mechanism to bridge the principle-based
resolution approach under out of court workout with that of the statutory umbrella of IBC
so that a resolution initiated out of court can be transitioned and get implemented under
IBC.
Recognising this requirement, the Pre-Pack Insolvency Resolution Process
(PPIRP/prepack) was introduced in 2021, aimed at resolution of micro, small and medium sector
enterprises (MSMEs), as an alternative to a regular CIRP. The Pre-pack was envisaged
to be a panacea for MSMEs as it had all the ingredients to make a successful resolution
recipe: debtor in possession, cost-effective, quicker resolution timelines and base
resolution plan prepared by the MSME itself. Under the pre-pack arrangement, the
MSMEs and creditors have to reach a prior agreement to resolve, before formally
entering into pre-pack insolvency process. Despite all the advantages, only ten
applications have been admitted under PPIRP so far, out of which one was withdrawn,
and resolution plans has been approved in five cases.
The IBBI had established an Expert Committee, which submitted its report in May 2023
on the Creditor-led Resolution Approach under the Insolvency and Bankruptcy Code,
2016. The report suggests converting the current fast-track process under the IBC into
a 'creditor-led' and 'out-of-court' insolvency resolution process, similar to the PPIRP, but
with key modifications to address challenges observed in the adoption of PPIRP. A
suitable framework could be adopted in this regard that would be aligned with the
intended objectives without undermining the essence of the IBC.
(iii) Role of Committee of Creditors (CoC)
The IBC assigns a central role to the Committee of Creditors (CoC) in the CIRP.
However, this is an area where significant improvements are needed. There have been
instances where the CoC's performance has been found lacking in several aspects.
These include disproportionate prioritization of individual creditors' interests over the
collective interest of the group; disagreements among CoC members on approving a
resolution plan due to concerns over undervaluation or perceived lack of viability;
disagreements on the distribution of proceeds even when a resolution plan is agreed
upon; non-participation in CoC meetings and lack of effective engagement,
coordination, or information exchange among members. Instances have been noted
regarding insufficient skill sets in areas like corporate finance, legislation, and industry
knowledge; and, lastly, the nomination of financial creditors to the CoC are entrusted
with responsibilities that far exceed their actual authority.
It is in the larger interest of the creditors that the issues relating to the conduct of the
CoC are addressed by the members themselves without waiting for regulatory
prescriptions or fiats. However, it is a fact that when incentives are not perfectly aligned,
deviations from best practices become the norm. Therefore, we need an enforceable
code of conduct for the CoC. Obviously, it would not be possible for the sectoral
regulators to enforce this given the diverse set of financial creditors. Ideally, the IBBI,
which is the designated regulator under the IBC, should have the powers to enforce
norms around the conduct of all stakeholders under the IBC process.
(iv) Role of the Resolution Professional
Another key stakeholder under the IBC ecosystem is the Resolution Professional (RP)
whose expertise and proficiency materially impacts the outcome of the resolution
process. The resolution professional should have thorough knowledge of the industry,
the business environment, laws in force and should also be adept at financial analysis
and management of distressed firms. The aspect of management is very critical here as
the RP takes control of the distressed corporate debtor and virtually discharges the duty
of the MD/CEO, based on the advice of the CoC. Any shortcomings in the selection and
in the action of the RP would be a significant impediment in the process. The code
implicitly and explicitly casts lot of operational responsibilities on the RP ranging from
collation of claims to finding prospective resolution applicants to providing material
inputs to CoC for finalising the resolution plan. However, in many instances, the RP do
not enjoy the cooperation of other stakeholders, which impairs the ability of the RP to
discharge its duties satisfactorily. It is heartening to note that that IBBI has taken steps
to facilitate the training of RPs through the continuing professional education (CPE)
programs, trainings, workshops, webinars, and seminars. These steps together with
better enforcement of conduct related regulations would go a long way in addressing
these issues.
(v) Incentivising resolution professionals
Regulations can set the boundaries for an activity but cannot cover every detail. While
regulations have helped create an ecosystem for Resolution Professionals (RPs), their
compensation should be determined by the market based on commercial
considerations. RPs step in after all attempts to resolve the issue by the debtor and
creditors fail, and they take on the important task of managing the debtor's affairs.
Managing a corporate debtor under insolvency proceedings requires specialized skills.
The market should develop compensation structures for RPs that are tied to the
outcomes of the resolution process. This would address the principal-agent issue and
align the RP's goals with the CoC, maximizing value for both parties. It would also
attract experienced professionals, benefiting the system as a whole.
Way Forward
It has been nearly eight years since the introduction of the code and several large
cases have been successfully resolved under the code. Quality data is being
generated, out of the insolvency process, which could be used in future as inputs for
credit underwriting as well as valuation.
The IBC eco-system would not be complete if it cannot provide a feedback loop to the
real economy through a review of experience in resolution or liquidation. A detailed
study of enterprises placed under the insolvency process can provide valuable insights
if we compile data from such cases. Currently such data is not compiled systematically
and is disaggregated, mostly concentrated with individuals based on their experience
and exposure. If this data is collected and institutionalised through a structured process,
it can give us valuable insights and precedents on how to proceed in complex cases.
Such data therefore needs to be gathered in a structured manner so that it can be
disseminated for the benefit of all stakeholders involved.
Leveraging Data-
There are few key areas that could be explored further to improve the overall resolution
ecosystem. First, a better understanding of the reasons behind defaults-whether this is
on account of the general economic environment, specific industry challenges, or
professional mismanagement. This perspective can help to tailor appropriate solutions.
Second, addressing the delay resulting from lack of cooperation by some corporate
debtors in the insolvency process, such as delay in submitting information, withholding
valuable details, using litigation to stall progress, or creating indirect obstacles to
discourage potential resolution applicants, is crucial. Finally, examining valuation,
including insights on how collateral types affect realization versus valuation, the impact
of time on recovery, and the relationship between resolution timelines and valuation
outcomes, could provide us with information which can help us to improve the process.
Perhaps better valuation at the time of appraisal is the key. Often the disparity in
valuation between the appraisal and the resolution stages is indicative of over
exuberance in valuation and possible lack of appropriate due diligence.
-and Technology
With the rise of technology, the payment ecosystem has undergone significant
transformation. Fintech service providers are using technology to gain insights into
consumer behaviour through the vast payment data generated. Some progress has
been made in using technology for loan underwriting, particularly for small borrowers
and MSMEs, through cash flow-based models. The next step should be for banks and
other stakeholders to use technology to help resolve issues with stressed borrowers.
The technology should focus on several key areas like predicting defaults before they
happen based on the borrower's data, enabling early corrective action; analysing both
structured and unstructured data to identify related party or preferential transactions,
saving resources for lenders and resolution professionals; automating routine tasks in
post-disbursement credit monitoring, freeing up time for lenders to focus on more
complex issues; and reading legal documents and contracts to provide valuable insights
for the CoC and resolution applicants when valuing the corporate debtor. As technology
and its application evolves on these fronts, there could be significant reduction in effort
involved as well as costs associated with the resolution.
Conclusion
I would like to close my remarks with few parting thoughts! It is possible that bankruptcy
or liquidation proceedings may be the only way for the company to revive and start
afresh. We should, however, look to restructuring and revival of units as the first option
and enable it in a quick and time bound manner. There are valuable assets vesting
within an enterprise that we as a nation can ill afford to run doing even though as
creditors the liquidation process appears as the safer and risk free option. For this it
may be necessary to create an ecosystem that encourages revival of the enterprises.
While IBC 2016 remains a landmark legislation, that has fundamentally altered the
landscape of corporate practices in the country, the onus is on us to ensure that
collectively, we harness the potential of the code to create a thriving ecosystem which
enables value preservation.
In our journey to improve the resolution frameworks, let us not only look at the
perceived obstacles or the roadblocks but also look back at the path we have traversed
so far and the learning's along the way. We need to think of measures which can make
the code an effective option for unlocking economic value of an enterprise even as we
ensure strict enforcement of the provisions of the code in case of recalcitrant or
unscrupulous borrowers. The last decade has been a journey of learning,
improvements, and growth for all of us who are stakeholders in this process as
Regulators, financial institutions or as borrowers. This Conclave should bring out fresh
insights as to how to unlock the potential of the Code which will serve to strengthen the
financial system, so that it plays its role in fostering a robust growth for our nation.
Thank you and Namaskar.
1
RBI Supervisory returns
2
Data referred to in this Speech in respect of various aspects of cases referred under
IBC has been compiled from IBBI Quarterly Newsletters
3
Data compiled by RBI from concerned banks
|
['rajeshwar rao: strengthening the insolvency and bankruptcy code (ibc) framework for effective resolution inaugural address by mr rajeshwar rao, deputy governor of the reserve bank of india, at the international conclave, jointly organised by the insolvency and bankruptcy board of india (ibbi) and insol india, new delhi, 7 december 2024.', '* * * good morning ladies and gentlemen.', "at the outset, i would like to thank shri ravi mital, chairperson, insolvency and bankruptcy board of india for inviting me to this international conclave on the theme 'insolvency resolution: evolution & global perspective' being held in collaboration with insol india.", 'a confluence in the thought processes of policy makers, practitioners and academicians would perhaps help to shape an objective assessment of the resolution & insolvency regime in the country.', 'this should then enable us to chart out a future path for the resolution processes to make it more effective and efficient.', "today, let me begin by reflecting on the role of insolvency and bankruptcy code (ibc) in cleaning up of banks' balance sheets and on the possible ways we could further leverage its potential for the key stakeholders from our perspective, viz.", 'the present insolvency and bankruptcy regime in india was the outcome of the suggestions made by the bankruptcy law reforms committee headed by dr. t k viswanathan.', "the committee's recommendations for the new insolvency and bankruptcy resolution system were based on a few core principles namely (i) facilitating the assessment of viability of the enterprise at an early stage; (ii) enabling symmetry of information between creditors and debtors;(iii) ensuring a time-bound process to better preserve economic value; (iv) respecting the rights of all creditors, with clarity on priority; and (v) ensuring finality of outcomes.", 'the outcome of the action on these recommendations was the insolvency and bankruptcy code (ibc) of 2016. the code and its related ecosystem have continued to evolve since then, effectively advancing the principles mentioned above.', 'however, its implementation being a function of the broader ecosystem in which it operates, the code has faced various criticisms in its relatively short existence, particularly regarding delays in meeting timelines and unsatisfactory recovery rates, partly due to the misaligned incentives amongst the stakeholders.', 'while several amendments have been made to the ibc since its introduction to address some of these concerns, challenges persist.', 'role of ibc in cleaning up of bank balance sheets as you are aware, asset quality position of the banking system has shown a remarkable improvement over the past few years - specifically, the gross npas of the scheduled commercial banks have declined from the peak of 11.2% in march 2018 to 2.8% in 1 march 2024 .', 'a good part of that reduction is attributable to resolution processes enabled under ibc.', 'if an overall assessment of ibc is made, it shows a significant level 2 of traction as a resolution mechanism.', 'as of september 2024, 8,002 cases have been admitted into the corporate insolvency resolution process (cirp) and approximately 75% of these cases were closed through resolution, withdrawal, review, settlement, or liquidation.', 'of the closed cases, 56% were either resolved, settled, or withdrawn.', 'in a positive trend, the ratio of resolutions to liquidations has risen from 21% in 2017-18 to 61% in 2023-24. in addition to facilitating resolution outcomes, the ibc has also been effectively used by both financial and operational creditors to encourage borrowers to repay their debts.', 'by march 2024, 28,818 cases involving an outstanding default amount of 10.22 lakh crore were withdrawn prior to admission.', 'in terms of the powers vested under newly inserted section 35aa of the banking regulation act, rbi had issued directions to banks in 2017 in respect of 41 entities, which accounted for more than 35% of the banking system npas at that point, for filing cirp applications.', 'so far, resolution plan has been approved in the case of 17 3 borrowers , orders of liquidation have been issued in the case of 12 borrowers, settlement was reached by lenders with 2 borrowers; and in 4 cases the lenders have assigned their exposures to arcs.', 'the aggregate realisation for financial creditors from the 17 resolved cases has been around 50% of admitted claims and 190% of liquidation value.', 'financial creditors are now actively leveraging the code for resolution of stressed assets.', 'as of september 2024, around 633 corporate debtors, where insolvency application was initiated by financial creditors, have been successfully resolved under ibc, yielding an average realization of 30.09% of admitted claims.', 'further, cirp applications filed by financial creditors in 702 corporate debtor accounts have been either resolved through appeal/review/settlement or withdrawn under section 12a.', 'similarly, liquidation orders have been passed in respect of 1224 corporate debtors.', 'moreover, the operationalisation of section 227 of the code in 2019 empowered reserve bank to leverage the ibc mechanism for resolution of financial service providers (fsps).', 'reserve bank has used this avenue for initiating insolvency proceedings against four fsps so far and all of them have been successfully resolved as on date.', 'evidentially, ibc seems to have played a significant role in cleaning up the bank balance sheets.', 'although the ibc has proven to be a valuable tool for creditors, its full potential has been realized only to a limited extent.', "let me elaborate on some of the factors that have constrained its effectiveness to give a clearer understanding of why the ibc's potential has not been fully harnessed.", '(i) delay in initiation time and timing are both crucial for the effectiveness of the resolution process.', 'while delays within the ibc process have been widely discussed, an equally important issue is the delay in initiating the ibc process itself.', 'the ibc grants all creditors the right to initiate the cirp upon default.', 'however, in practice, the average time taken by financial creditors from the date of default to the filing of the cirp is often several months.', 'a significant amount of value is lost during this period, which ultimately impacts the recovery outcome.', 'in this context, the role of financial creditors is vital-they must take prompt action to prevent further value erosion.', 'while ibc has gained prominence of late, we need to realise that it is just one amongst the host of mechanisms available for creditors to resolve financial stress.', 'there are other statutory mechanisms for enforcing security, as well as out-of-court workout options for resolution, each with its own role and limitations.', 'from a regulatory perspective, the reserve bank remains neutral regarding the mechanisms chosen by lenders, as long as the actions are initiated in a timely manner so as to facilitate the prompt resolution of financial distress.', '(ii) efficacy of out of court workouts the real success of a formal insolvency framework lies in its role as a deterrent than based on its actual use.', 'it is out of court workout procedures that need to work as the primary instruments of resolution, albeit under the shadow of the formal insolvency framework.', "in the indian context, the rbi's prudential framework on resolution of stressed assets provides a viable out of court workout mechanism.", 'this prudential framework provides a broad principle-based regime for early recognition of stress and time-bound resolution by the lenders.', 'however, the efficacy of this mechanism has been constrained on account of several factors, including issues with coordination among lenders.', 'what is therefore required is a mechanism to bridge the principle-based resolution approach under out of court workout with that of the statutory umbrella of ibc so that a resolution initiated out of court can be transitioned and get implemented under ibc.', 'recognising this requirement, the pre-pack insolvency resolution process (ppirp/prepack) was introduced in 2021, aimed at resolution of micro, small and medium sector enterprises (msmes), as an alternative to a regular cirp.', 'the pre-pack was envisaged to be a panacea for msmes as it had all the ingredients to make a successful resolution recipe: debtor in possession, cost-effective, quicker resolution timelines and base resolution plan prepared by the msme itself.', 'under the pre-pack arrangement, the msmes and creditors have to reach a prior agreement to resolve, before formally entering into pre-pack insolvency process.', 'despite all the advantages, only ten applications have been admitted under ppirp so far, out of which one was withdrawn, and resolution plans has been approved in five cases.', "the ibbi had established an expert committee, which submitted its report in may 2023 on the creditor-led resolution approach under the insolvency and bankruptcy code, 2016. the report suggests converting the current fast-track process under the ibc into a 'creditor-led' and 'out-of-court' insolvency resolution process, similar to the ppirp, but with key modifications to address challenges observed in the adoption of ppirp.", 'a suitable framework could be adopted in this regard that would be aligned with the intended objectives without undermining the essence of the ibc.', '(iii) role of committee of creditors (coc) the ibc assigns a central role to the committee of creditors (coc) in the cirp.', 'however, this is an area where significant improvements are needed.', "there have been instances where the coc's performance has been found lacking in several aspects.", "these include disproportionate prioritization of individual creditors' interests over the collective interest of the group; disagreements among coc members on approving a resolution plan due to concerns over undervaluation or perceived lack of viability; disagreements on the distribution of proceeds even when a resolution plan is agreed upon; non-participation in coc meetings and lack of effective engagement, coordination, or information exchange among members.", 'instances have been noted regarding insufficient skill sets in areas like corporate finance, legislation, and industry knowledge; and, lastly, the nomination of financial creditors to the coc are entrusted with responsibilities that far exceed their actual authority.', 'it is in the larger interest of the creditors that the issues relating to the conduct of the coc are addressed by the members themselves without waiting for regulatory prescriptions or fiats.', 'however, it is a fact that when incentives are not perfectly aligned, deviations from best practices become the norm.', 'therefore, we need an enforceable code of conduct for the coc.', 'obviously, it would not be possible for the sectoral regulators to enforce this given the diverse set of financial creditors.', 'ideally, the ibbi, which is the designated regulator under the ibc, should have the powers to enforce norms around the conduct of all stakeholders under the ibc process.', '(iv) role of the resolution professional another key stakeholder under the ibc ecosystem is the resolution professional (rp) whose expertise and proficiency materially impacts the outcome of the resolution process.', 'the resolution professional should have thorough knowledge of the industry, the business environment, laws in force and should also be adept at financial analysis and management of distressed firms.', 'the aspect of management is very critical here as the rp takes control of the distressed corporate debtor and virtually discharges the duty of the md/ceo, based on the advice of the coc.', 'any shortcomings in the selection and in the action of the rp would be a significant impediment in the process.', 'the code implicitly and explicitly casts lot of operational responsibilities on the rp ranging from collation of claims to finding prospective resolution applicants to providing material inputs to coc for finalising the resolution plan.', 'however, in many instances, the rp do not enjoy the cooperation of other stakeholders, which impairs the ability of the rp to discharge its duties satisfactorily.', 'it is heartening to note that that ibbi has taken steps to facilitate the training of rps through the continuing professional education (cpe) programs, trainings, workshops, webinars, and seminars.', 'these steps together with better enforcement of conduct related regulations would go a long way in addressing these issues.', '(v) incentivising resolution professionals regulations can set the boundaries for an activity but cannot cover every detail.', 'while regulations have helped create an ecosystem for resolution professionals (rps), their compensation should be determined by the market based on commercial considerations.', "rps step in after all attempts to resolve the issue by the debtor and creditors fail, and they take on the important task of managing the debtor's affairs.", 'managing a corporate debtor under insolvency proceedings requires specialized skills.', 'the market should develop compensation structures for rps that are tied to the outcomes of the resolution process.', "this would address the principal-agent issue and align the rp's goals with the coc, maximizing value for both parties.", 'it would also attract experienced professionals, benefiting the system as a whole.', 'way forward it has been nearly eight years since the introduction of the code and several large cases have been successfully resolved under the code.', 'quality data is being generated, out of the insolvency process, which could be used in future as inputs for credit underwriting as well as valuation.', 'the ibc eco-system would not be complete if it cannot provide a feedback loop to the real economy through a review of experience in resolution or liquidation.', 'a detailed study of enterprises placed under the insolvency process can provide valuable insights if we compile data from such cases.', 'currently such data is not compiled systematically and is disaggregated, mostly concentrated with individuals based on their experience and exposure.', 'if this data is collected and institutionalised through a structured process, it can give us valuable insights and precedents on how to proceed in complex cases.', 'such data therefore needs to be gathered in a structured manner so that it can be disseminated for the benefit of all stakeholders involved.', 'leveraging data- there are few key areas that could be explored further to improve the overall resolution ecosystem.', 'first, a better understanding of the reasons behind defaults-whether this is on account of the general economic environment, specific industry challenges, or professional mismanagement.', 'this perspective can help to tailor appropriate solutions.', 'second, addressing the delay resulting from lack of cooperation by some corporate debtors in the insolvency process, such as delay in submitting information, withholding valuable details, using litigation to stall progress, or creating indirect obstacles to discourage potential resolution applicants, is crucial.', 'finally, examining valuation, including insights on how collateral types affect realization versus valuation, the impact of time on recovery, and the relationship between resolution timelines and valuation outcomes, could provide us with information which can help us to improve the process.', 'perhaps better valuation at the time of appraisal is the key.', 'often the disparity in valuation between the appraisal and the resolution stages is indicative of over exuberance in valuation and possible lack of appropriate due diligence.', '-and technology with the rise of technology, the payment ecosystem has undergone significant transformation.', 'fintech service providers are using technology to gain insights into consumer behaviour through the vast payment data generated.', 'some progress has been made in using technology for loan underwriting, particularly for small borrowers and msmes, through cash flow-based models.', 'the next step should be for banks and other stakeholders to use technology to help resolve issues with stressed borrowers.', "the technology should focus on several key areas like predicting defaults before they happen based on the borrower's data, enabling early corrective action; analysing both structured and unstructured data to identify related party or preferential transactions, saving resources for lenders and resolution professionals; automating routine tasks in post-disbursement credit monitoring, freeing up time for lenders to focus on more complex issues; and reading legal documents and contracts to provide valuable insights for the coc and resolution applicants when valuing the corporate debtor.", 'as technology and its application evolves on these fronts, there could be significant reduction in effort involved as well as costs associated with the resolution.', 'conclusion i would like to close my remarks with few parting thoughts!', 'it is possible that bankruptcy or liquidation proceedings may be the only way for the company to revive and start afresh.', 'we should, however, look to restructuring and revival of units as the first option and enable it in a quick and time bound manner.', 'there are valuable assets vesting within an enterprise that we as a nation can ill afford to run doing even though as creditors the liquidation process appears as the safer and risk free option.', 'for this it may be necessary to create an ecosystem that encourages revival of the enterprises.', 'while ibc 2016 remains a landmark legislation, that has fundamentally altered the landscape of corporate practices in the country, the onus is on us to ensure that collectively, we harness the potential of the code to create a thriving ecosystem which enables value preservation.', "in our journey to improve the resolution frameworks, let us not only look at the perceived obstacles or the roadblocks but also look back at the path we have traversed so far and the learning's along the way.", 'we need to think of measures which can make the code an effective option for unlocking economic value of an enterprise even as we ensure strict enforcement of the provisions of the code in case of recalcitrant or unscrupulous borrowers.', 'the last decade has been a journey of learning, improvements, and growth for all of us who are stakeholders in this process as regulators, financial institutions or as borrowers.', 'this conclave should bring out fresh insights as to how to unlock the potential of the code which will serve to strengthen the financial system, so that it plays its role in fostering a robust growth for our nation.', 'thank you and namaskar.', '1 rbi supervisory returns 2 data referred to in this speech in respect of various aspects of cases referred under ibc has been compiled from ibbi quarterly newsletters 3 data compiled by rbi from concerned banks']
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Rajeshwar Rao
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Reserve Bank of India
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Deputy Governor
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India
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https://www.bis.org/review/r241218f.htm
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Philip R Lane: The euro area outlook and monetary policy
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Speech by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the MNI Webcast, Frankfurt am Main, 18 December 2024.
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2024-12-18 00:00:00
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SPEECH
The euro area outlook and monetary policy
Speech by Philip R. Lane, Member of the Executive Board of the
ECB, MNI Webcast
Frankfurt am Main, 18 December 2024
Introduction
The Governing Council last week decided to lower the deposit facility rate - the rate through which we
steer the monetary policy stance - from 3.25 per cent to 3.0 per cent. This decision was justified by
our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength
of monetary policy transmission. In my remarks, I would like to discuss these three elements of our
reaction function 2]
The inflation outlook
The December Eurosystem staff projections expect headline inflation to average 2.4 per cent in 2024,
2.1 per cent in 2025 and 1.9 per cent in 2026. It is then projected to increase to 2.1 per cent in 2027 as
a result of the expanded EU Emissions Trading System. The projections continue to foresee a rapid
decline in core inflation, from 2.9 per cent this year to 2.3 per cent in 2025 and 1.9 per cent in 2026
and 2027. Compared to the September 2024 macroeconomic projections exercise (MPE), the
projections have been revised down by 0.1 percentage points in 2024 and 2025 for headline inflation,
and in 2026 for core inflation.
The latest Survey of Monetary Analysts is broadly in line with the December projections for headline
inflation. Market-based indicators of inflation compensation are also consistent with a timely return of
inflation to target, while also showing a marked compression in inflation risk premia. This may suggest
that markets have revised downwards the risk of future adverse supply shocks and revised upwards
the risk of future adverse demand shocks.
The economic outlook plays a central role in determining the inflation outlook. The incoming
information suggests a slowdown in the near term. Looking ahead, conditions are in place for growth
to strengthen over the forecast horizon. According to the staff assessment, while structural factors
have weighed on the euro area economy, especially the manufacturing sector, the weak productivity
growth since 2022 has also included a significant cyclical component, largely driven by the past
tightening of monetary policy and weak external demand. Domestic demand should therefore benefit
from rising real wages, the gradual fading of the effects of restrictive monetary policy and the ongoing
recovery in the global economy. Although fiscal policies are set to remain on a consolidation path
overall, funds from the Next Generation EU programme will still support investment in the next two
years.
On the external side, euro area export growth is expected to benefit from strengthening foreign
demand. At the same time, trade uncertainty has increased materially and the effects of a potential
increase in tariffs on the euro area economy will depend on the extent, timing and magnitude of tariff
and non-tariff measures, as well as on the responses of the EU and other countries.
The labour market remains resilient. Employment grew by 0.2 per cent in the third quarter, again
surprising to the upside, and the unemployment rate remained at its historical low of 6.3 per cent in
October. However, labour demand continues to soften. The job vacancy rate declined to 2.5 per cent
in the third quarter, 0.8 percentage points below its peak, and surveys also point to fewer jobs being
created in the current quarter.
According to the December Eurosystem staff projections, real GDP growth is expected to average 0.7
per cent in 2024, 1.1 per cent in 2025, 1.4 per cent in 2026 and 1.3 per cent in 2027. Compared to the
September projections, real GDP growth has been revised down by 0.1 percentage points in 2024 and
2025. The latest Survey of Monetary Analysts indicates a lower growth profile than the staff projections
for 2025, 2026 and 2027.
The inflation outlook also encompasses the assessment of the risks surrounding the baseline path.
The risks to economic growth remain tilted to the downside. The risk of greater friction in global trade
could weigh on euro area growth by dampening exports and weakening the global economy. Lower
confidence could prevent consumption and investment from recovering as fast as expected. This could
be amplified by geopolitical risks, such as Russia's unjustified war against Ukraine and the tragic
conflict in the Middle East, which could disrupt energy supplies and global trade. Growth could also be
lower if the lagged effects of monetary policy tightening last longer than expected. It could be higher if
easier financing conditions and falling inflation allow domestic consumption and investment to rebound
faster, which would also make the euro area more resilient to global shocks.
Inflation could turn out higher if wages or profits increase by more than expected. Upside risks to
inflation also stem from the heightened geopolitical tensions, which could push energy prices and
freight costs higher in the near term and disrupt global trade. Moreover, extreme weather events, and
the unfolding climate crisis more broadly could drive up food prices by more than expected. By
contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical
events prevent consumption and investment from recovering as fast as expected, if monetary policy
dampens demand more than expected, or if the economic environment in the rest of the world
worsens unexpectedly. Greater friction in global trade would make the euro area inflation outlook more
uncertain.
Underlying inflation
The indicators of underlying inflation with the highest predictive power are developing in line with a
sustained return of inflation to target; in particular, the Persistent and Common Component of Inflation
(PCCl) measure remains at around 2.0 per cent. Domestic inflation, which closely tracks services
inflation, again eased somewhat in October. But at 4.2 per cent, it remained high, reflecting strong
wage pressures and the fact that some services prices have still been adjusting to the past inflation
surge.
At the same time, the incoming information points to a moderation in services inflation dynamics,
which should support an easing of domestic inflation. The three-month-on-three-month seasonally
adjusted services inflation rate fell to 2.6 per cent in November from 3.4 per cent in October, indicating
a further softening in momentum. Meanwhile, the sizeable gap between services inflation and its
medium-term underlying trend - captured by the PCCI for services, which stands at 2.5 per cent -
suggests there should be further downward adjustment in services inflation in the coming months.
The incoming wage data broadly confirm our previous assessment of elevated but easing wage
pressures. The growth rate of compensation per employee moderated to 4.4 per cent in the third
quarter from 4.7 per cent in the second quarter, 0.1 percentage points below the December projection.
The growth rate of unit labour costs eased to 4.3 per cent from 5.2 per cent. Profit margins continue to
buffer the impact of elevated labour costs on inflation: annual growth in unit profits remained negative
in the third quarter. Forward-looking wage trackers continue to point to a material easing of wage
growth in 2025.
The strength of monetary policy transmission
Market interest rates in the euro area have declined further since our October meeting, reflecting the
perceived worsening of the economic outlook and the consequent repricing of policy rate expectations.
Our past interest rate cuts - together with the anticipation of future cuts - are gradually making it less
expensive for firms and households to borrow. The average interest rate on new loans to firms was 4.7
per cent in October, more than half a percentage point below its peak a year earlier. The cost of
issuing market-based debt has fallen by more than a percentage point since its peak. The average
rate on new mortgages has also come down, to 3.6 per cent in October, around half a percentage
point below its peak in 2023.
But financing conditions remain restrictive. The cost of new credit for firms is elevated in historical
comparison, particularly in real terms, and the cumulative tightening of credit standards since the
beginning of the hiking cycle remains elevated. The average rate on the outstanding stock of
mortgages is set to rise as loans granted at fixed rates reprice at higher levels. Bank lending to firms
has only gradually picked up, from subdued levels, with the annual rate of increase rising to 1.2 per
cent in October. The annual growth rate of debt securities issued by firms stood at 3.1 per cent in
October, remaining within the narrow range observed over recent months. Mortgage lending continued
to drift up gradually, to an annual growth rate of 0.8 per cent in October.
Conclusion
In summary, the incoming information and the latest staff projections indicate that the disinflation
process remains well on track. While domestic inflation is still high, it should come down as services
inflation dynamics moderate and labour cost pressures ease. Recent policy rate cuts are also
gradually transmitting to funding costs, but financing conditions along the entire transmission chain,
starting with the level of our policy rate and including the market interest rates that financial
intermediaries charge on credit to households and firms, remain restrictive.
This assessment explains the decision to lower the deposit facility rate by 25 basis points. Looking to
the future, in the current environment of elevated uncertainty, it is prudent to maintain agility on a
meeting-by-meeting basis and not pre-commit to any particular rate path. In terms of risk
management, monetary easing can proceed more slowly compared to the interest rate path
embedded in the December projections in the event of upside shocks to the inflation outlook and/or to
economic momentum. Equally, in the event of downside shocks to the inflation outlook and/or to
economic momentum, monetary easing can proceed more quickly. All else equal, the rate path will
also be influenced by our ongoing assessment of underlying inflation dynamics and the strength of
monetary policy transmission.
We are determined to ensure that inflation stabilises sustainably at our two per cent medium-term
target. We will follow a data-dependent and meeting-by-meeting approach to determining the
appropriate monetary policy stance. In particular, our interest rate decisions will be based on our
assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics
of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to
a particular rate path.
Annexes
18 December 2024
Slides
1.
A slide deck to accompany these remarks is available on the ECB website.
2.
For further discussion of last week's monetary policy decision, see Lagarde, C. (2024), "Monetary
policy in the euro area", speech at the Bank of Lithuania's Annual Economics Conference on "Pillars of
Resilience Amid Global Geopolitical Shifts", on the occasion of the 10th anniversary of euro
introduction, Vilnius, Lithuania, 16 December.
CONTACT
European Central Bank
Directorate General Communications
> Sonnemannstrasse 20
> 60314 Frankfurt am Main, Germany
> +49 69 1344 7455
> [email protected]
|
['speech the euro area outlook and monetary policy speech by philip r. lane, member of the executive board of the ecb, mni webcast frankfurt am main, 18 december 2024 introduction the governing council last week decided to lower the deposit facility rate - the rate through which we steer the monetary policy stance - from 3.25 per cent to 3.0 per cent.', 'this decision was justified by our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.', 'in my remarks, i would like to discuss these three elements of our reaction function 2] the inflation outlook the december eurosystem staff projections expect headline inflation to average 2.4 per cent in 2024, 2.1 per cent in 2025 and 1.9 per cent in 2026. it is then projected to increase to 2.1 per cent in 2027 as a result of the expanded eu emissions trading system.', 'the projections continue to foresee a rapid decline in core inflation, from 2.9 per cent this year to 2.3 per cent in 2025 and 1.9 per cent in 2026 and 2027. compared to the september 2024 macroeconomic projections exercise (mpe), the projections have been revised down by 0.1 percentage points in 2024 and 2025 for headline inflation, and in 2026 for core inflation.', 'the latest survey of monetary analysts is broadly in line with the december projections for headline inflation.', 'market-based indicators of inflation compensation are also consistent with a timely return of inflation to target, while also showing a marked compression in inflation risk premia.', 'this may suggest that markets have revised downwards the risk of future adverse supply shocks and revised upwards the risk of future adverse demand shocks.', 'the economic outlook plays a central role in determining the inflation outlook.', 'the incoming information suggests a slowdown in the near term.', 'looking ahead, conditions are in place for growth to strengthen over the forecast horizon.', 'according to the staff assessment, while structural factors have weighed on the euro area economy, especially the manufacturing sector, the weak productivity growth since 2022 has also included a significant cyclical component, largely driven by the past tightening of monetary policy and weak external demand.', 'domestic demand should therefore benefit from rising real wages, the gradual fading of the effects of restrictive monetary policy and the ongoing recovery in the global economy.', 'although fiscal policies are set to remain on a consolidation path overall, funds from the next generation eu programme will still support investment in the next two years.', 'on the external side, euro area export growth is expected to benefit from strengthening foreign demand.', 'at the same time, trade uncertainty has increased materially and the effects of a potential increase in tariffs on the euro area economy will depend on the extent, timing and magnitude of tariff and non-tariff measures, as well as on the responses of the eu and other countries.', 'the labour market remains resilient.', 'employment grew by 0.2 per cent in the third quarter, again surprising to the upside, and the unemployment rate remained at its historical low of 6.3 per cent in october.', 'however, labour demand continues to soften.', 'the job vacancy rate declined to 2.5 per cent in the third quarter, 0.8 percentage points below its peak, and surveys also point to fewer jobs being created in the current quarter.', 'according to the december eurosystem staff projections, real gdp growth is expected to average 0.7 per cent in 2024, 1.1 per cent in 2025, 1.4 per cent in 2026 and 1.3 per cent in 2027. compared to the september projections, real gdp growth has been revised down by 0.1 percentage points in 2024 and 2025. the latest survey of monetary analysts indicates a lower growth profile than the staff projections for 2025, 2026 and 2027. the inflation outlook also encompasses the assessment of the risks surrounding the baseline path.', 'the risks to economic growth remain tilted to the downside.', 'the risk of greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy.', 'lower confidence could prevent consumption and investment from recovering as fast as expected.', "this could be amplified by geopolitical risks, such as russia's unjustified war against ukraine and the tragic conflict in the middle east, which could disrupt energy supplies and global trade.", 'growth could also be lower if the lagged effects of monetary policy tightening last longer than expected.', 'it could be higher if easier financing conditions and falling inflation allow domestic consumption and investment to rebound faster, which would also make the euro area more resilient to global shocks.', 'inflation could turn out higher if wages or profits increase by more than expected.', 'upside risks to inflation also stem from the heightened geopolitical tensions, which could push energy prices and freight costs higher in the near term and disrupt global trade.', 'moreover, extreme weather events, and the unfolding climate crisis more broadly could drive up food prices by more than expected.', 'by contrast, inflation may surprise on the downside if low confidence and concerns about geopolitical events prevent consumption and investment from recovering as fast as expected, if monetary policy dampens demand more than expected, or if the economic environment in the rest of the world worsens unexpectedly.', 'greater friction in global trade would make the euro area inflation outlook more uncertain.', 'underlying inflation the indicators of underlying inflation with the highest predictive power are developing in line with a sustained return of inflation to target; in particular, the persistent and common component of inflation (pccl) measure remains at around 2.0 per cent.', 'domestic inflation, which closely tracks services inflation, again eased somewhat in october.', 'but at 4.2 per cent, it remained high, reflecting strong wage pressures and the fact that some services prices have still been adjusting to the past inflation surge.', 'at the same time, the incoming information points to a moderation in services inflation dynamics, which should support an easing of domestic inflation.', 'the three-month-on-three-month seasonally adjusted services inflation rate fell to 2.6 per cent in november from 3.4 per cent in october, indicating a further softening in momentum.', 'meanwhile, the sizeable gap between services inflation and its medium-term underlying trend - captured by the pcci for services, which stands at 2.5 per cent - suggests there should be further downward adjustment in services inflation in the coming months.', 'the incoming wage data broadly confirm our previous assessment of elevated but easing wage pressures.', 'the growth rate of compensation per employee moderated to 4.4 per cent in the third quarter from 4.7 per cent in the second quarter, 0.1 percentage points below the december projection.', 'the growth rate of unit labour costs eased to 4.3 per cent from 5.2 per cent.', 'profit margins continue to buffer the impact of elevated labour costs on inflation: annual growth in unit profits remained negative in the third quarter.', 'forward-looking wage trackers continue to point to a material easing of wage growth in 2025. the strength of monetary policy transmission market interest rates in the euro area have declined further since our october meeting, reflecting the perceived worsening of the economic outlook and the consequent repricing of policy rate expectations.', 'our past interest rate cuts - together with the anticipation of future cuts - are gradually making it less expensive for firms and households to borrow.', 'the average interest rate on new loans to firms was 4.7 per cent in october, more than half a percentage point below its peak a year earlier.', 'the cost of issuing market-based debt has fallen by more than a percentage point since its peak.', 'the average rate on new mortgages has also come down, to 3.6 per cent in october, around half a percentage point below its peak in 2023. but financing conditions remain restrictive.', 'the cost of new credit for firms is elevated in historical comparison, particularly in real terms, and the cumulative tightening of credit standards since the beginning of the hiking cycle remains elevated.', 'the average rate on the outstanding stock of mortgages is set to rise as loans granted at fixed rates reprice at higher levels.', 'bank lending to firms has only gradually picked up, from subdued levels, with the annual rate of increase rising to 1.2 per cent in october.', 'the annual growth rate of debt securities issued by firms stood at 3.1 per cent in october, remaining within the narrow range observed over recent months.', 'mortgage lending continued to drift up gradually, to an annual growth rate of 0.8 per cent in october.', 'conclusion in summary, the incoming information and the latest staff projections indicate that the disinflation process remains well on track.', 'while domestic inflation is still high, it should come down as services inflation dynamics moderate and labour cost pressures ease.', 'recent policy rate cuts are also gradually transmitting to funding costs, but financing conditions along the entire transmission chain, starting with the level of our policy rate and including the market interest rates that financial intermediaries charge on credit to households and firms, remain restrictive.', 'this assessment explains the decision to lower the deposit facility rate by 25 basis points.', 'looking to the future, in the current environment of elevated uncertainty, it is prudent to maintain agility on a meeting-by-meeting basis and not pre-commit to any particular rate path.', 'in terms of risk management, monetary easing can proceed more slowly compared to the interest rate path embedded in the december projections in the event of upside shocks to the inflation outlook and/or to economic momentum.', 'equally, in the event of downside shocks to the inflation outlook and/or to economic momentum, monetary easing can proceed more quickly.', 'all else equal, the rate path will also be influenced by our ongoing assessment of underlying inflation dynamics and the strength of monetary policy transmission.', 'we are determined to ensure that inflation stabilises sustainably at our two per cent medium-term target.', 'we will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.', 'in particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.', 'we are not pre-committing to a particular rate path.', 'annexes 18 december 2024 slides 1. a slide deck to accompany these remarks is available on the ecb website.', '2. for further discussion of last week\'s monetary policy decision, see lagarde, c. (2024), "monetary policy in the euro area", speech at the bank of lithuania\'s annual economics conference on "pillars of resilience amid global geopolitical shifts", on the occasion of the 10th anniversary of euro introduction, vilnius, lithuania, 16 december.', 'contact european central bank directorate general communications > sonnemannstrasse 20 > 60314 frankfurt am main, germany > +49 69 1344 7455 > [email protected]']
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Philip R Lane
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European Central Bank
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Member of the Executive Board
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Ireland
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