So good morning, everyone. And we have our panel on the challenges of low interest rate environment and financial stability. And we have a very good panel to discuss those challenges to different sectors and aspects of the economy. We have Governor Francois Villarrois, Governor of the Bank of France. We have Bernadino, you are here. Gabriel Bernadino as president of Iowa. And we have Claudio Borio from the BIS. Let me say a few words to start, not so much to discuss the consequences and the particular challenges that come from this low interest rate environment. But just to highlight that this environment is the consequence of manufacturers, and in particular of real economy developments in advanced economies. Indeed, the interest rates and the whole spectrum of interest rates is, of course, influenced by monetary policy, especially in normal times, the short end of that spectrum, and then also determined by financial markets. And so what are the factors that have led to this situation? Starting, say, with monetary policy, we all know that monetary policy for quite some time, since the so-called inflation targeting regime became dominant in monetary policy frameworks, it has a holy grail of trying to follow what is the real equilibrium interest rate or what is the neutral rate. That holy grail that would guarantee long-term full employment with stable inflation, which is the ideal situation. And of course, that neutral rate is not observable directly, but economists have devised different methods and ways to try to determine what is that neutral rate. And both from models and also extracting some wisdom from the long-term rates in the market and decomposing the factors that determine those market long-term rates. Well, the more theoretical and model-based approach links, of course, the long-term real equilibrium rate to the potential growth rate of GDP so that the situation of dynamic efficiency would be assured and also with stable inflation. And then there are models that using normally common filter techniques try to calculate these and observable by embedding an equation that links the real equilibrium rate to the rate of potential growth plus an observable drivers of that equilibrium rate that are then determined in a model that has an aggregate supply function and an aggregate demand function and using then the projections of that model and the common filter, then the unobservable drivers are identified. That's the method that has been promoted for quite some time by John Williams and Laubard from the San Francisco Fed. And using that approach, they now show that the real equilibrium rate in the US is slightly negative. And we also in house have made the same approach to these determination of the real equilibrium rate. And we also find negative equilibrium rate for the euro area. In a speech I did in June, I revealed those internal estimates of real equilibrium rates for the euro area calculated that way. But also, if we use another approach, which is to look to the market and see what are the determinants of long term interest rates and decompose the drivers of those long term rates, these normally are characterized in the first expected inflation, second the term premium, and third the expected path of short term rates in the future. And then the term premium is then divided into two components, inflation risk and the real term premium, the one really connected with real factors. And all these different drivers of the market long term interest rates have been coming down, expected inflation down, the expected path of future interest rates down. There is in the market this conviction that we will face a long period of low growth, secular stagnation, all that debate. And in what regards inflation risk, markets don't see inflation risk ahead and volatility of inflation. So the nominal component of term premium is also going down. And the real component of the term premium also for all these factors. And also because what affects also that term premium is the problem of the insufficiency of safe assets in our economy since the crisis. And this savings glut approach has been underlined mostly by Caballero, Gorinches, and collaborators to show that this big increase in demand for safe assets and the decrease of supply of safe assets because many government bonds that used to be considered safe before the crisis, after the crisis, are no longer considered safe assets. And so there is a big imbalance and that then contributes to the decline of the term premium. Just as a parenthesis, if the supply of safe assets would increase by, for instance, some advanced countries increasing fiscal policy expansion and increasing the supply of safe assets, that in a model with non-recardian effects that would increase the long-term rates just as a parenthesis. So it's all these factors that have led monetary policy to follow these developments and try to correct the situation that was created by the crisis and try to influence the cyclical factors that would lead to a economic recovery, closing negative output gaps, and normalizing the level of inflation. And monetary policy has been since 2010 almost alone in trying to achieve that, that cyclical recovery. Because since 2010, fiscal policy has been restrictive both in the US and in Europe. And in Europe, very much behind the double dip that we had in growth in 2011 and 12. So monetary policy has its mandate in the case of the ECB and the euro area very clearly giving absolute priority to price stability and inflation. And so we have been pursuing this mandate. Of course, central banks have been fundamental in addressing the risks of the crisis. But we all hoped that the reaction of the economy would have been much quicker as a result of the expansionary monetary policies that were put in place. It's taking longer than anyone expected the recovery. And it has been much soft recovery that anyone expected. And we are aware that a low interest rate environment for a long period of time creates risks. Risks in general to financial stability, not only because it can lead to search for yield and potentially to imbalances in asset markets by creating too rich valuations in some asset markets, which then creates the risk of boom and bust with all its consequences later on. And also because it puts pressure on profitability of financial institutions. And that is another element of these risks. I leave to the panelists to address these risks for different sectors. So I will not dwell on that. Our analysis in what regards the European situation is that these risks are real. And we monitor them very closely. But we trust that the set of macro-potential policies are and should be the first line of defense in relation to those risks as a complement to monetary policy. Because monetary policy has to do its main task and to follow its mandate. Of course, it would be nice if monetary policy would be helped by other policies in trying to achieve a quicker close of the output gap and a quicker normalization of inflation rate. But that's not for us to take decisions in the other fields. But certainly, we keep saying practically in all our initial statements in our press conferences after our meetings that, indeed, other policies have to contribute. And more and more markets and analysts are aware of these challenging situations. So let's see what the panelists and the debate will bring in relation to addressing the challenges and risks that emerge from this situation. I will follow, because it's the simpler approach, the order that is in the program. And so I would give first the floor to François Villarrois. Please, François. Thank you, Victor. Does it work? Yeah. And good morning to everybody. Victor, as our chair, has already addressed many issues. So I will only complement his remarks. Starting with the observations that our issue raises a complex definition question. What are exactly low rates? And you'll notice probably that there is growing confusion in the public debate with two other concepts, negative rates and flattening of the yield curve. These three issues, low rates, negative rates, and flattening of the yield curve are linked, but they are different. So before talking about the consequences on financial stability, I would like to start with this definition question. What do we mean by low rates? And what are the causes? I will perhaps touch a bit upon monetary policy, as Victor did. And as I guess, Claudio will probably do. But we'll see if it's exactly with the same wording. So first, what do we mean by low rates? Let me share or remind you of some very simple figures and with the most common reference, nominal interest rates. So if it's OK, I have a first slide. This way. So nominal interest rates as a financial crisis clearly caused a break with short-term nominal rates on the left, flattening first in the United States in red and then in the euro area in blue, from above 5% to close to 0% in a short period of time. Whereas long-term nominal rates on the right decreased more gradually. These developments obviously reflect the responses of central banks to the crisis. They had to bring down interest rates to stimulate the economy and bring inflation back to a more sustainable path. As regards real interest rates, the trend after the financial crisis is less striking, even though both short-term on the left and long-term rates on the right in the US as well in the euro area have decreased. But more importantly, if we go back further in time, and here we go back up to the 50s or the 60s, real rates have been fluctuating significantly over the period. And they have already been negative in the past, and they peaked in the 80s and 90s. Nevertheless, which period is an exception is still unclear? Is it the current low real rate situation or the 80s, 90s high real rates episode? Anyway, the overall trend since the 80s is of a decrease in real rates, still more when it comes to long-term rates on the right. This is consistent with estimates of the natural and equilibrium real rate of interest. Vito has elaborated on it, so I will not repeat what I said. Given these fundamental developments, it would be unwise to expect real interest rates rising to the level of the 80s and 90s any time soon. These various simplified elements suggest two tentative conclusions for the future and for the timing. Low for how long, which is a key question for our panel. First, nominal interest rates are now probably close to a low point, which doesn't imply they will rebound soon. The ECB has cut one of its key policy rates to negative territory. And let me repeat that negative rates are a useful part of our toolkit, but there are clearly limits to them. We know there is a lower bound, even if we don't know exactly where it is, somewhere slightly below zero. However, the pace of any rise in nominal interest rates will depend on the pace of inflation getting back to the target, which depends on the accommodative stance of our monetary policy and on the broader economic recovery. We at the ECB were clear in saying that policy rates would remain at current levels all over for the necessary period of time. We will be in a position to normalize policy rates only if we keep them low for as long as it takes to push inflation up. This is the apparent paradox highlighted by Mario Draghi. I quote him. It was in the bill title, so in a German interview last April, low interest rates today will lead to higher rates tomorrow. Second tentative conclusion about real interest rates. My first one was about nominal rate. Here there are more uncertainties, because in the longer term, and you said it, real rates primarily result not from our monetary policies but from non-monetary factors. They reflect the underlying fundamentals of the economy. The superabundance of savings related to investment has been famously called the savings glut. But it may be more accurate and more promising to call it the investment durf, rather than the savings glut. For some countries in East Asia and in the euro area, the gap between savings and investment, as we know, is staggeringly large. In 2015, the current account surplus was a bit more than 3% of GDP in the euro area, and up to 8.5% of GDP in Germany. Higher long-term real interest rates require a structural rebalancing of savings and investment and clearly fostering investment rather than reducing savings. That means structural reforms, as well as coordinated actions at euro area to boost investment. In that context, from these two tentative conclusions, and this is a very important point for financial stability, what kind of economic environment can financial institutions expect? The timing horizon is decisive for our panel today. Low for very long wouldn't be the same. In the short run, obviously, interest rates will stay low and the yield curve will remain rather flat. But in the longer run, as inflation picks up, nominal rates should, in all likelihood, rise again, more strongly or less slowly than real rates. In addition, while inflation will recover, the yield curve should steepen as markets would expect a further rise in future interest rates. This is crucial. Since what matters for the profitability of banks is nominal rates, not real ones, and the slope of the yield curve. And I come to my third and last point in the meantime, what are the consequences for financial stability? There are two concerns today, even if the economic environment is to improve later, as I just said. First, obviously lower profitability for financial institutions. Insurance and pension funds, and Gabrielle will probably elaborate still better than I will on these issues. Insurance and pension funds with a high level of fixed rate guarantees suffer from a widening gap between the high level of interest rates served on liabilities and the low interest rates at which matter in capital and interest are reinvested. As for banks, the cut in interest rates and flattening of the yield curve are squeezing the net margin. But this is not the whole story about the consequences of our monetary policy and of low rates. And this issue is very debated. So let me recall you our own analysis about bank profitability, because monetary policy has also had offsetting positive effects. Landing volumes have picked up again. Banks have booked significant capital gains. The cost of risk has fallen as borrower solvency has improved. And the cost of funding, including market financing, has become cheaper due partly to our TLTRO2 program. Let me stress that the strong take up in September's TLTRO, as we published it yesterday, shows its firepower, which had been underestimated by many analysts. So all in all, and when we speak of the effects of our monetary policy for banks, we should take all the components, and not only the negative ones. I guess we thought this is music to your ears. I read it on your body language, but these are really figures. It's also music to my own ears, to be frank. But these are figures we are ready to discuss. But I draw your attention on the fact that banks only speak about the negative elements, which we can understand, but this is not the global picture. So our estimates indicate a net positive impact of recent monetary policy measures on bank profitability for the period 1417, as you can see it. Nevertheless, we need to be vigilant going forward as to the impact of low interest rates on bank profitability. Second concern, low interest rate could also lead to excessive risk taking. We in the ESRB and in the euro system are closely monitoring the financial system, its participants, its markets, and we are alert to any sign of widespread imbalances in asset prices, notably inequities and in real estate. We do not observe general destabilizing trends at present, but we stand ready to act, if needed, using our macro-potential tools. Two responses are needed in this context from financial institutions as well as from supervisors. First, financial institutions have to adjust their business model. The challenge for their profitability is probably, according to the tentative conclusions I drew some minutes ago. The challenge is probably less a future and very prolonged period of very low nominal interest rates than the present accumulation of low rates, digitalizations, and regulation. Each of these three evolutions is well-founded and manageable, but their coexistence creates without doubt a demanding challenge. Many financial institutions, including French ones, are already adapting. For insurance companies, the priorities are to move from guaranteed return to unit-linked business models and to gradually lower the returns on risk-free life insurance savings. And this is of utmost importance. As for banks, expanding non-interest-based business operation and increasing diversification is one way to reduce their vulnerability to the contraction of the net interest margin. More generally, improvements in terms of efficiency are necessary when cost-income ratios are high. And obviously, a resilient financial structure is of the essence. Here may I stress one thing. Markets should better differentiate between the global European picture and some specific cases. The global European picture is of substantially enhanced resilience since the crisis. Since 2012, so in the last period, the core equity tier one of significant institutions in the Eurora has risen from 9% to 13%. But there are still some issues with certain banks, regarding non-performing loans in Italy and Portugal, for instance. Now, these need to be addressed seriously, but they are manageable if dealt with in a timely manner, as illustrated by the Irish or Spanish experience. And within a more solid European banking system, we should obviously not fear cross-border mergers. Cross-border mergers are the logical answer to the overbanking situation put forward by Mario yesterday. I spoke about financial institutions adaptation. Let me conclude with supervisors. Supervisors have to adapt the way they control banks and interest. It's true for insurance companies. And we at the ACPR in France are putting supervisory pressure individually on insurance to take account of the current environment. And as you know, with respect to banks, business model analysis and profitability has been made a priority by the SSM for 2016. The French macroprudential authority called the HCFF, or Conseil de Stabilité Financière, also plays its full part. For instance, and this is an interesting example, we are closely monitoring the commercial real estate sector. We recently announced that we were ready to trigger macroprudential instruments if necessary. Last but not least, we as regulators obviously have to stabilize the rules. But last, eight years after Le Mans, and this is the clear and shared objective of the Basel discussion at present. But in doing so, we should avoid overburning European banks, which have, as said, significantly improved the quantity and quality of capital they hold, and which are currently faced with the challenge of profitability. In this regard, the G20 and Geos commitment to finalize Basel free, as you know, without a significant increase in overall capital requirements is of utmost importance. Let me put it in other words, more capital means more financial stability, but only up to a point. If this implies excessive constraint on banks, less efficient transmission of our active monetary policy, and hence, less growth, it would then become counterproductive. One last sentence. In the current context, our goal should not be to kill the pain, supposedly the low nominal rate environment, but rather to kill the disease, which is too low inflation. Our commitment as central bankers is to deliver price stability. We fulfill our mandate, but as you said, we should not be alone. And other economic policies should address the structural challenges I also mentioned. Thank you for your attention. Thank you, François. Thank you, François, for addressing the whole environment of the banking sector in particular, and showing how we keep with great attention, keep monitoring the developments in the banking sector and the full effects of our policies. And our policies are working, although we would appreciate the help of other policies. Our policies are working because we have kept the recovery ongoing. And our projections for inflation show that next year we will be with inflation clearly above one and on the path to normalizing inflation. And that then will create a new environment, a new situation, and certainly will help also the financial sector as a whole. And now we turn to another sector, insurance, which also is affected by this low environment, although, and that is a challenge, if we look to the return on equity of insurance companies in the past six years, and it continues, they show still, on average, a ROE of 8%, 9%, whereas the banks are, as you know, much, much lower that. So it seems that the problem is of the insurance, which are real, are not yet showing in the short term or in the near future, but are indeed concerns for the medium and long term. But I give the floor to the specialists. Bernardino, please. Thank you very much, Victor, and thanks, of course, for the invitation to be here. I think it's very important and encouraging that, of course, in these discussions, in the context of DSRB about financial stability in the financial sector, we also touch, of course, on insurance and pensions. And if, of course, there's a risk that is definitely considered one of the main risks right now in the two sectors, it's, of course, low interest rates. Just to comment on your ROE, Victor, the truth is also that insurance companies have been having a much more stable ROE even before the crisis. It was not so big as it was in the banking sector. So it's diminishing a little bit, but it's more, I think, overall, it's more stable, definitely. Now, in terms of the low interest rate, I will try to focus a little bit on two things. On the one side, on consequences, and on the other side, on responses. Now, the consequence, I think, it's clear in terms of the effects on both sides of the balance sheets of insurance. And if you look at what the euro swap curves are and you have represented in here a number of them in the latest months and years, of course, we see a tremendous move down, of course. As it continues to decrease, this has a clear impact. At first instance, of course, on the liabilities of this type of companies. Just to give you an overall idea, each movement down on an average of 100 basis points in the interest rate, it's more or less 10% higher of liabilities in a normal insurance company in terms of long-term commitments. So if you see where the curves were three, four, five years ago and where we are right now, you see that, of course, the impact this has on the liability side of insurance. And of course, the point in here is that there are consequences both on profitability as it was mentioned by Gouvernon-Françal Virgo, but also on solvency and on business models. I'll try to touch upon a little bit on that. As I said, of course, affects both sides of the balance sheet. If you look at the investments in insurance and in pension funds, you see, of course, a huge predominance of yield investments, depending, of course, very much on the type of the structure of each of the systems, but you see a predominance of bond investments both in life and in non-life insurance, a little bit less in pension funds that have a little bit more of exposure to equity. But overall, of course, there's quite a huge impact in terms of the asset side of these institutions. Now, this, of course, can make a positive element also. And I think this is one of the elements that monetary policy want to boost is, of course, to have a potential reallocation to other types of assets, more, I would say, diversified investments. And we have been very clear on saying that this is not something negative for us. On the contrary, as potential supervisors, I definitely prefer to have a more diversified investment policy from these institutions than to have concentrated somehow, as we had in the past, in sovereigns, in banks. I think having a more diversified investment policy, it's a good thing. Of course, what is happening for all the effects, of course, of these policies is that, as Victor mentioned, there's a clear lack of safe assets. And these four insurance and pension funds, it's fundamental because especially long-term safe assets would be, of course, a privileged investment from the side of these institutions in order to match these more long-term liabilities. So anything that can be done in order to reinforce the existence of these long-term safe assets, it will be, I think, very much positive for the sectors. Now, also, this move and this potential reallocation to more risky assets creates, I would say, two issues. One is, of course, if there is, I would say, a search for yield that it's taken to a limit. Now, we have not been seeing that until now. That's clear that there is, of course, movement to more diversified investments. There's more investments in infrastructure. There's more investments in real estate, for example. But it's still definitely under a manageable situation. So we are, of course, monitoring this very closely. We don't see until now an excessive risk-taking being there in the insurance and pension funds area. But this also questions another element, which is the capacity of risk management. And, of course, both insurers and pension funds are very used to invest in certain types of instruments. If you go and you need to go in search for yield beyond the natural type of assets that you manage, then, of course, you need to have capacity to analyze the risks, to have a good management of these risks. And this is something that, particularly for small and medium-sized companies, it's a challenge, definitely. And that is why, for example, in terms of solvency, two of these elements of pillar two, better risk management capabilities are fundamental. Now, of course, what we see also out there as a risk and as a consequence of all of this, it's valuation risk, as it was mentioned. And, of course, this is something which worries us, of course, because as you may know, one of the main risks for the insurance sector, for example, will be a double-hit scenario, a scenario where we continue to have prolonged low interest rates, and at the same time, we have a reversal of the risk premium that probably someday will come, because, of course, the fundamentals of some of the valuations that we see out there are not reflected in the prices. And, of course, this double-hit, then it will create a lot of issues, especially, of course, if it's not managed in a good way. Of course, the situation in the insurance sector, for example, with a stock of guaranteed products that were there in the past creates a lot of reinvestment risk for the European insurance and pension funds. And, of course, the negative impact is much more pronounced when you have bigger duration mismatches. And we had a number of situations where the normal, the usual type of investment policies were not in there to close this duration between assets and liabilities. And, of course, that effect of offering investment risk is quite bigger. Of course, this is more a stock issue. Let's be very honest, of course. We see, and you have this graph in there, you see that, of course, insurance companies have been decreasing the guaranteed interest rates, because, of course, the new products are then, of course, much more aligned to the current rates in the market. But still, of course, there's the issue of the stock that was there in the past. Now, with Solvency 2, of course, implementation, we bring the element of resilience to another level, definitely. And let's be realistic. There have been a number of these promises, these contracts, these guaranteed contracts made in the past, where I would say that the pricing of options again guarantees in these contracts was not made in, I would say, a sound way. And, of course, when you enter into account with the new regime like Solvency 2, where, of course, this is much more realistic market consistent valuation, you have a number of issues. Now, the introduction of the regime, of course, was done with transitional periods, also precisely to deal with this and to try to build resilience, but at the same time avoid disruption and avoid incidents of instability. Now, on the pension side, just to give you a little bit of a flavor, these are some numbers that we had from a report that we published recently. On the pension fund side, the issue is, I would say, more deeper in the sense that in most of the countries, the valuation approach of liabilities, it's not so much taken into account the low interest rate environment in which we are. And, of course, when you do a more realistic market consistent valuation, you see that, on average, the national regime's value pension liabilities 20% lower than it would be a more realistic basis. And as you know, many of these occupational pension funds have been still, even with these regimes, being run with deficits, of course. When you go for a more realistic valuation, the deficit increases, I would say, close to four times. The picture is different in different countries, of course. The Netherlands is the one that is closer because they have been, of course, making quite some adjustments in their regime. But they're, of course, various different situations. And this is an element which I think is fundamental in order to deal with the issue. First, you need to stop being in a denial phase, which I think it's a little bit what we have around Europe sometimes. Now, the effects on business models. And that, I think, is particularly relevant. And we have heard, of course, on the banking side, but definitely on the insurance side, also in the pension side. On life insurance, of course, with long-term guarantees, but also on the defined benefit pension plans. The sustainability, of course, because of the low interest in environment, especially if it is, of course, prolonged, the sustainability is severely questioned. And this is clear, and I think we need to say it. And we have been saying it is very often. But also on other types of businesses, because even on the non-life side of insurance, where, of course, it's much less correlated, of course, the liability side less correlated to financial markets. But even though, of course, the lower investment returns put a lot of pressure in terms of the equilibrium in the overall technical management of the business, which puts a lot of pressure on increasing the premiums with, of course, consequences also for consumers. So this is an element which, of course, in balance is the business model. Of course, we are witnessing, as Governor said, an acceleration of the move towards more unit link products, more defined contribution plans. And, of course, this has other consequences, because then, of course, it puts a lot of pressure on the consumer protection side. Because it's not without risk this move from institutions being the ones that are managing risk to transfer the risk mostly to households and to the retail investors. And so a tremendous attention needs to be made, of course, and to put on the disclosure elements, on the transparency of this move, on the selling practices also in the insurance sector. So this is also an element which I think it's very important. And that we have been at AOPA quite stepping up also in terms of the conduct of business supervision and the transparency in this area. Now, in terms of responses from our side very briefly, we started a long time ago working, I remember, Becky, even when we started in 2011, but we had our opinion, our first opinion in 2013, on the supervisor response to the low interest rate environment, where we had a number of recommendations already to enhance supervision, to enhance the monitoring of these activities, but also on promotion of industry actions. And at that point in time, it was already very clear it's expressed in there that changes in business models are necessary. So that this cannot only be solved by a change in regulatory frameworks or by actions by supervisors. We need the industry also to move. I think it took some time, definitely, but we see definitely right now a completely different ambient. And we see this movement in terms of adapting business models clearly there. Of course, in our stress tests along the years, we have been quite focusing on this low yield environment with clear recommendations also towards supervisors to focus on the sustainability of the businesses. And that there was an overall after our stress test in 2014 during the 2015, there was an overall analysis in Europe, in the different countries, on the sustainability of each of these business models. And a lot, I think, have been made also in this area. Now also, of course, we have been taking our responsibilities looking at the regime, looking at Solvency 2, and of course monitoring the implementation to look upon the impact of the long term guarantee measures and also on the transitional provisions that, as I mentioned, are there. And this is a very important element because the transition provisions in Solvency 2, they are there in order to help to have a smooth entering into the regime, recognizing the fact, as I said, that there were some pricing of options and guarantees that were not the best one, but recognizing also that we are living in a completely different type of system. Now, it's fundamental that, of course, while we are in this transitional regime, that companies do their own own work and that they restructure their businesses because otherwise, at the end of the transition, we will be just adding up flow to the stock and we will be in the same circumstance. And so this is a clear message that we have been also giving to the national authorities that, of course, they need to be in close monitoring with industry to make sure that we get at the end of this transition in a completely different setting. And, of course, we are running this year the stress test on insurance side, where the focus is on the long-term guaranteed business. We will disclose the results and this year. Now, very briefly, going forward, what is missing? And I think that a lot has been done, as I said. I believe Solvency 2 has been, I would say, quite fundamental into moving us to another level of resilience, but also looking at anti-cyclical elements and to have this possibility to manage the change in a good way. But, of course, there's still some elements that, in our opinion, are missing. The first one is this element of a macroprudential framework that we have been discussing. And I really believe that we should look at the period of review of Solvency 2 that will be out there and to look at the system as we have it right now, which is, of course, a micro-supervisory regime. But it already includes a number of tools, a number of elements that deal with this more macro view, this more market-wide view. And we need to look at, I think, in terms of recognizing if we have tools that are sufficiently addressing and instruments that are there to deal with this following operative objectives that I mentioned in there. Sufficient reserving, which is in insurance, is fundamental. On average, 80% to 85% of the balance sheet of insurers are technical reserves. So I make this point very strongly because we need, of course, to understand and to learn between the different sectors. And there's a lot of things that are relevant in the banking regulation that we can take, of course, as an inspiration for insurance. But please also understand that the business models are different and the structures of balance sheet are different. If you want to have an anti-cyclical tool in insurance, it's not on the capital. It's on the technical provisions. That's where things matter. You do something anti-cyclical on capital. It's really small. So that's why we have a number of adjustments, what we call in this long-term guarantee measures, on the technical provisions. Because that's where the element of counter-cyclicality needs to be included. So we need to look at that, of course, at the loss of social capacity, avoiding, of course, the negative interconnections and the excessive concentrations. Are we having the tools sufficient to deal with this? But also, of course, looking at from a more, I would say, overarching perspective to the activities that can pull systemic risk. And as you know, the discussion in insurance on systemic risk is still, I would say, in these young ages. I'm definitely claiming that we should go to what I call a third generation of thinking in systemic risk in insurance. And I think we should use this opportunity of the Solvency City Review to deal with that. Of course, limiting prospecticality and avoiding moral hazard, of course. But I think what we need is to have a common basis for micro and macroprudential discussions and instruments. Of course, recovery and resolution is missing. And that is clear. Stefan made the point before. We totally agree with that. We believe that we need a minimization of tools and powers. We don't need a copy paste of BRRD, let me be very honest, even because, of course, right now I see the implementation is being quite painful. But that's not the point. I think that insurance, we have different specificities. And I think we need to take them into consideration. We need to build coherence between policy or the protection and financial stability. And we are working on that. And we hope to come out before the end of this year with a first discussion, a consultation paper. Finally, on pension funds. The first thing, as I said, it's to have a good analysis of where we are. And that's what we proposed in our opinion towards the political institutions in Europe to put in place this pillar two, common framework for risk assessment and transparency. And I'm very happy that this is gaining some track, also with the support of the SRB. This needs to be there in order to encourage timely adjustments. If you don't have a realistic valuation, you don't have a good dialogue between members and sponsors. And in order to have a fair distribution of shortfalls between generations, I think this is fundamental. And finally, in terms of consequences for financial stability, what we believe that needs to be much more deeper analyzed is what is the impact on the sponsors. Because to be very realistic, and I will stop with this one, to be very realistic, we have a lot of defined benefit pension plans where, of course, the promises, if this low interest rate environment continue, are unsustainable. And there's only two possibilities. Either you increase the contributions by the sponsors, or you reduce the benefits, or a combination of it. And this is something that needs to be discussed. Because otherwise, we will let the things move on, move on, kick the can down the road, and we will not get to a good outcome at the end of the day. And this, I think, is also an element that will have huge consequences for the economy and financial stability. Because these companies will probably, at some point in time, with a dramatic choice. Either you put more money in the pension fund, or you create jobs, and you create growth. And this is something that I think, from a macro perspective, it's pretty much relevant. That's what we want to analyze in our stress test next year on the pension funds. Thank you, Gabriel, for that. And particularly to pointing the problems of pension funds. Because of the different parts of the financial system about which we have talked about, banks, insurance companies, and now pension funds, pension funds are indeed the more severely hit by this low interest rate environment. And what we can expect in terms of returns. In the past 30 years, 85 to 2014, the average return of shares in the US and Europe was around 8%, up to 14%. We cannot expect that in the next 10, 20 years, this will be the same. It will not be the same. In this environment of low nominal growth, that it's on the cards for different reasons. But also, the return of bonds was during the same 30 years, 5% in the US, and 5.9% in Europe. Well, we are not there now, and we will not be there for quite some time. And that, of course, shows how, in particular, pension funds are very much hit by this. And this is not because of monetary policy. That was my concern in my introductions, really, to explain what monetary policy has to do. And now it goes about doing it. So these are very, very relevant things. And I'm sure now that Claudio will give us a very broad picture of the overall effects and challenges and risks and concerns that he has been voicing for quite some time. Claudio, please. Well, thank you. Thank you so much, Vita. And I really very much like to thank the organizers for inviting me to participate in this distinguished panel. I guess one was looking for a little bit of variety. So I'll try and provide some of that. So I will ask three questions and provide three possible answers. And let me stress that I will do this from a global perspective. This is not a jurisdiction's perspective analysis. First of all, why have interest rates been so low for so long globally? I will argue that no doubt, as we heard in some of the previous presentations, a number of factors have been at work, including, of course, and importantly, real factors. But I will also say that the role of the monetary policy regimes in place has not been fully appreciated. Second, what are the consequences? Well, in addition to the well-known intended consequences, such persistently low rates also have unintended ones, including, as we heard, raising longer-term financial and macroeconomic risks. And I will focus on these. And third, are such low rates here to stay? Well, they may well be. But if they do rise, given initial conditions, the risk of a snapback at the long end should not be underestimated. So let me take each of these three points in turn. First, why are interest rates so low? Well, at one level, of course, the answer is quite simple, because central banks and market participants set them there. Now, I don't think anyone would disagree that the proximate determinant of market interest rates is a combination of central bank and market participants' actions. Central banks set the nominal short-term rate and they influenced the long-term nominal interest rate through signals of their future policy rates and purchases of assets. In turn, market participants adjust their portfolios based on their expectations of central bank policy, of their views about what other factors are driving long-term rates, of their attitude towards risk, and of various ban and sheet constraints, not least regulation. Now, given nominal interest rates, actual inflation determines exposed real rates and expected inflation exante real rates. But of course, these are the proximate determinants. What about the ultimate determinants, especially of persistently negative real interest rates, those that we have seen so far? I think that here it's useful to consider also the consequences of such low rates, because given that our economic models rely on unobservable variables, it is precisely the assumed macro economic consequences of low rates that at the end of the day, when all is said and done, are used to infer the determinants of low rates. So there is a little bit of reverse engineering here, and I will try and clarify what I mean by that. So what are the ultimate determinants? Well, the prevailing view is that in the long run, real interest rates are determined only by real factors. Now, by long run, I do not necessarily mean the steady state, which is a kind of analytical concept. But given that we are here at a policy panel, I'm really thinking of a horizon which is relevant for policy. So let's take for concreteness, say, a decade. Now, in turn, this implies that over that horizon, nominal interest rates cannot have an impact on real variables, and they can only affect inflation. This is so-called monetary policy neutrality. Therefore, if the central banks set the nominal interest rate at the wrong level, this will result in changes in inflation. So for given inflation expectations, if output is above potential, the output gap is positive, inflation will rise. And if it is below, inflation will fall. So put differently, and this is what Vitor was emphasizing before. There is a natural interest rate, or call it a full equilibrium interest rate, which is unobservable, and that is independent of monetary policy. Central banks, if they do their job correctly, will simply passively follow this rate in the long run. And it is the behavior of inflation that provides the key signal about the existence of a wedge between the market interest rate and this unobservable natural interest rate. Inflation, therefore, tells us whether the rate is above or below the natural rate when output is at potential, another unobservable variable. Now, this view is common to the secular stagnation, the global saving gap, and also the safe asset shortage hypothesis to the extent that it includes prices explicitly. Now, I think that there are two empirical observations, however, that cast some doubt on this view. The first is that financial booms and busts and the resulting crises tend to have permanent effects on output, and you would also see very long-lasting effects on productivity growth. By permanent effect on output, what I mean is that output may go back to its previous long-term growth rate, but it follows a lower parallel path. If so, as long as monetary policy has a material impact on these financial booms and busts or the financial cycle, as the evidence does suggest, well, it cannot be neutral over the relevant policy horizon, long-term horizon that I mentioned earlier, because also these financial booms and busts are quite long. The second observation is that there is only a weak link between measures of domestic output gaps and inflation. This is well known, but this also raises the questions about the reliability of inflation as a signal of potential, or sustainable output, and of the wedge between the market and the unobservable natural rate. Recall that inflation was low and stable ahead of the great financial crisis, and that traditional measures of the output gap identified that output was at potential, or was in fact higher than potential, only exposed after the crisis and with the benefit of hindsight. I'm talking about all the measures that international institutions and policymakers tend to use. By contrast, in some research that we have done at the BIS, we have found that proxies for financial imbalances could have identified, in real time, as events unfolded that output was above potential. Now, this is really intuitive, because as events unfolded, the signs of unsustainable economic expansion took the form of rising financial imbalances and not of rising inflation. Now, given these two observations, it is possible to make a case for a complementary, and let me stress, complementary explanation for the very low interest rates, one explanation that assigns a higher weight to monetary policy. And let me mention two mechanisms. The first mechanism has to do with the financial booms and busts and reflects asymmetric responses to them. Monetary policy fails to lean against unsustainable financial booms. Booms and busts cause long-term economic damage. Policy responds very aggressively and above all, persistently to the bust, showing the seeds of the next problem, so that over time, this imparts a downward bias to interest rates and an upward bias to debt and contributes to a kind of debt trap, so that policy runs out of ammunition. And it becomes harder to raise interest rates without causing economic damage, owing to the large debts and distortions in the real economy that have accumulated over time. So that over a sufficiently long horizons, low interest rates become to some extent self-validating. Two low rates in the past are one reason and of course not the only reason for such low rates today. In other words, policy rates are not simply passively reflecting some deep exogenous forces, technology, demographics, income distribution. They're also helping to shape the economic environment policy makers take as given or exogenous when tomorrow becomes today. Now, the second possible mechanism has to do with possible changes in the inflation process. In a highly integrated global economy with low cost new entrants, both product and labor markets have arguably become more contestable. This means a loss of pricing power for firms, but above all a loss of bargaining power for labor. An issue which is magnified by resistance to exchange rate appreciation by those very low cost producers. Think for example of the entry of former communist countries into the global trading system. Now all this implies significant desinflationary secular pressures over the horizon over which globalization exerts its impact. And it also implies that it is harder to get second round effects. So if this is true, if this is part of what has been going on, then expansionary monetary policy would have a more temporary effect on inflation. So that if inflation is below target, the central bank has to ease repeatedly to achieve it. And in the process of course nominal and hence also real interest rates decline. Now let me stress, and this is really absolutely critical, that it's very hard to adjudicate empirically between these two hypotheses, between the prevailing view and the other complementary one that I have been putting forward. And the key reason is that the traditional view depends crucially on unobservable variables whose values are reversed engineered based on theories, on theories about how the economy works. The natural rate, potential output, potential growth, or the nirum. In the end, what is the support for the view that the interest rate is low because the natural rate is low? Well at the cost of some oversimplification let me say well that inflation is very low. Is that growth is relatively low and that market interest rates are low way out the yield curve with what part of the analysis that Vitor was stressing. But there is a major problem of observational equivalence here and I suspect that someone like Popper I think will not be particularly pleased about the state of our discipline. Now let me say that given all of these difficulties by the way, what happens if one allows two competing hypotheses to run against each other? So we have the Laubach-Williams type of approach but what if we try and allow it to compete and allow the data to tell us whether the financial variables that I was telling you before have an impact. Remember what I said that you could actually tell that output was ahead of potential in real time. Well actually we have done that exercise in a paper that came out in July in that sort of quite technical paper. But we tend to find in that context that in fact the measures of the natural rate are higher than would otherwise be. But these are just estimates for the reasons that I mentioned earlier. Now but let me leave you with two thoughts on this big sort of uncertainty issue or this if you like observational equivalence. First, given that as a price is we know can be misaligned for very long periods. And this of course is a very familiar source of financial instability. What grounds do we have for believing that this cannot be true also of long-term rates which after all are just another asset price? And hence what grounds do we have for believing that those interest rates that are prevailing today are at the right level even if that level is historically unprecedented? And is it a coincidence and this is my second question that under the gold standard which was a very different monetary policy regime market interest rates never hit the zero lower bound. This was a period in which there was no monetary policy to speak of. Central banks kept interest rates pretty much constant and less convertibility. The convertibility constraint came under threat at which point they raised the rates. Now under this regime volatility aside, prices tended to fall or rise gradually over long periods. But critically during this period during this historical phase, interest rates were never as persistently low as they have been today relative to growth which as we said earlier is a key benchmark for interest rates. Now to my mind this is a telling indication of the relevance of monetary policy regimes in general and of the current regime's strong response as we know to low inflation below target. What are the consequences for financial stability? Well I'll be very brief here because they have already be touched upon. But persistent ultra low interest rates raise risk for financial stability in at least two ways. The first is that they encourage the buildup of debt and hence of the debt trap that I mentioned earlier. Now importantly the ratio of debt to GDP has kept rising globally since the great financial crisis. And indeed low rates can spread across jurisdictions as monetary policy regimes interact. Low rates in those countries that have experienced a bust are adopted in others experiencing financial booms owing to resistance to unwelcome exchange of appreciation. It may be because inflation is also below target or because they're concerned about competitiveness of other reasons. And in fact it's quite, I think it's worrying that in the countries that were least affected by the crisis we're now seeing in some of them the same qualitatively the same signs of financial imbalances building up as we saw ahead of the crisis in those advanced economies that were hit by that, by the crisis. Now I'm not just meaning emerging market economies including some of the largest ones but also advanced economies. And in fact especially but not only commodity exporters. So there they indicate as the typical indicators that we used to measure financial stability risks the financial booms and the like tend to be flashing amber or red. Now the second way is that such low rates and we heard quite a lot of that tend to weaken the profitability and soundness of financial institutions. And here as we heard is mainly the nominal interest rates that matter not so much the real rates. They sap the banks net interest margins and reduce their incentive and ability to write off bad loans. Now of course there are counteracting effects as Dieter noted there are capital gains and you also have the effects to the extent that you manage to boost the economy through credit quality. But part of the problem here is that some of these effects are temporary whereas the net interest margins remain. So what we're really concerned about is not so much the fact that interest rates are low but that they will be low or they could be low for very long is the persistence of low rate. Low rates that it is a problem. And of course we've done some research at the BIS that tends to confirm this. And by the way just anecdotally a Japanese banker once told me that such persistently low rates mean as low death for banks. So let's try let's hope that such rates don't persist. And part of the problem by the way we talked about business models. It's absolutely crucial that banks change their business models. But one of the ironies is that the business model that proved most robust to the great financial crisis was the retail business model. But that is also the model which is most vulnerable to these very very low persistently low rates. So it's very hard to find to say what is the business model apart from cutting costs that banks should adopt. And then we heard a lot about over banking and this is a critical issue but I'll leave that aside. As far as the impact on insurance companies and pension funds I won't add anything to what you said but just make a slightly broader point which connects to what you said about pension funds. And yesterday for example we heard that in the case of the mortgage market and macroprudential policies if you take a narrow financial stability perspective if you look at the financial system you should not be so concerned. But then we know that mortgage problems can have an impact on expenditures and therefore come back onto to hit the financial system through another route. Well I think the same applies to the situation of pension funds that you mentioned. You mentioned the corporate sector but it goes way beyond that. It's the fact that households and so on that may not be saving enough for their retirement. And sooner or later that would be a problem that will be on the public finances and on the broader economy generally. So let me just conclude with one small point. So our interest rates such low rates here to stay. I think it was a Danish politician I think it was Danish who famously said it's not wise to make forecasts especially about the future. But I think it is more sensible to make conditional statements. So what would it take for interest rates to rise? Well if my analysis is correct given current monetary policy frameworks the necessary and sufficient condition is significantly higher inflation. Higher growth by itself I think will not do unless inflation also rises. I remember I mentioned this big gap between interest rates and growth. Globally it's quite large by historical standards. And think also of Japan which has had one of the highest per capital growth rates among advanced economies over the past decade and yet is trying very very strongly to get inflation up and has very very low interest rates. Now will higher inflation emerge? Well it's clearly possible and if it did as I mentioned before the snapback risk should not be underestimated given the extraordinary initial conditions. Therefore financial institutions should manage it prudently and supervisors make sure that they do. Still if globalization and the entry of low cost producers has played such a key role as I suggested it may take quite some time. And it may even take a reversal of the globalization process to reverse the disinflationary headwinds the global economy has been facing for so long. If so I would suggest that this solution would be worse than what is today regarded as a major problem. Thank you. Thank you Claudio. Well long before the Danish politician you voted Voltaire said it better. He said we should not insult the future by trying to predict it. So it has really a precedent there. But okay we have to try to forecast and your last point are low rates here to stay for long. Difficult to say certainly they will be lower for quite some time lower than they used to be. That's for sure. But what we are doing is creating the conditions for future higher interest rates and higher inflation. And as I said and then I will risk to predict the future not very long far away future by saying that by the spring we will have inflation in the Euro area around one and a quarter percent. We are on the path of correcting this situation as a result of monetary policy. I shortened my introduction because I wanted to have a few minutes to react to your intervention which was of course very serious and arguments that have to be considered because they are of course quite pertinent. But on the big discussion between what you call the prevailing view about the neutral rate and so on and your doubts about VIXEL that inflation would be a good indicator of a gap between the neutral natural rate and the market rate. I can see the point that globalization has been a factor there. So it was not as in the time of VIXEL certainly that the domestic conditions were prevailing and then just observing what would be happening to inflation would be a good indicator of the gap. I can see the point about globalization but the point about booms and busts and the fact that they affect the potential growth while it's true but in the present situation if we look to what happened since the crisis to the leverage in the financial system and if we take your BIS analysis of the credit to GDP gap which is well below any historical average we don't see the pressure on potential boom with a subsequent bust of the type that we had at the crisis. We are not there neither in terms of leverage or in terms the credit to GDP gap. So and we are attentive to this thing because we don't want no one wants a repeat of the crisis that we had and so it won't happen that way. And then it was fascinating when you said that monetary policy shapes the whole spectrum of interest rates even in the long term which is a very bold statement because it means that underlying your view it's the view that monetary policy and money is not neutral even in the long term. And that would lead to a very serious theoretical debate. You could use Tobin about that but nevertheless just to say as you said it's very difficult to adjudicate in your view. I think that the prevailing view in particular as a consequence of the prevailing data about leverage and about the credit to GDP gap and all that we are not in such a situation. That some of the effects that have been protecting both banks and insurance companies meaning capital gains are temporary. Yes, they are temporary of course and we know that. And we also know that monetary policy still has leeway to continue its role but it's not infinite of course. One day in the future it will reach a limit so we know that but the solution to that problem is really to have a different policy mix that will accelerate the recovery of our economies and contribute to normalize inflation. And what is happening in the US is very important for that future because if indeed the Fed feels confident enough say in December to raise rates it proves two things. First, that monetary policy can do it because in the US was also only monetary policy since 2010 and that it is possible to normalize inflation with time and that will be very reassuring and I hope when, if and when it happens it will lift animal spirits everywhere. So we are looking forward to that one but now we have an highlight of our debate because the organizers foresaw not only a panel of three panelists but also a discussant. And we have as a discussant Professor Elena Carletti from Bocconi but also from the advisory scientific committee of the ESRB and in that capacity on top of all that she was co-chairing a vast endeavor that was organized by the ESRB in collaboration with the Financial Stability Committee of the ECB to analyze the consequences of the low interest rate environment and that has led to a full thick report with annexes that will be published. And so no one better than Professor Carletti could really be a discussant of what the panelists have said. Please. Thank you very much. Thank you for giving me the possibility to talk about some insight from the task force that we are very happy to have finished. Let me say that this task force has been, as Vice President said, has been a big enterprise that lasted over 18 months and involved about 60 to 70 people working for it. So it was really a big exercise. And I had the privilege of the burden of co-chairing it together with Jacek Ozinski that is sitting here from the advisory technical committee and John fell from the Financial Stability Committee that should also be in the room. So let me say my goal today is not so much to discuss but rather complement the previous presentation also because I had expected that the Vice President would comment a lot on the presentation of Claudio Borio as we discussed yesterday. So let me raise two points for discussion. Let me retake two questions and give you the answer with the insight of the task force. So first question, why are rates so long and will they stay so in particular? And what are the implications of the low interest rate environment for financial stability in the different sectors as we have already heard, therefore banks, pension funds, insurance companies and so on, but also cross sectors. Let me say that indeed the task force made two important contributions. One was to have a forward looking view, therefore trying to guess this future that is so difficult to predict. And the second to have a system wide view meaning not only looking at each sector individually but also try to understand the interrelation and interconnection in particular going forward across sectors. So let me give you some initial answer. Why are rates so low? Well, we somehow spouse in the task force to view the structural factors have indeed a substantial role in the current low interest rate environment. In the particular productivity growth but mostly demographic and demographic trends. What are the implications for financial stability? Well, there are three main groups of risks that relate to processes and trends that we see going on in the financial system. First of all, there are risks related to the sustainability of business model as we have already heard, the pressures on profitability of banks, insurance funds and pension funds and insurance companies, but also generalized risk taking that we define broad based risk taking because it's not just by the normal institution therefore not just banks, but also other institutions and what we somehow we could call shadow entities. And finally, and this is more the forward looking approach that we have in the task force, we see risks related to changes in the financial system structure and in particular meaning the disintermediation of banks in Europe and the growing position of known banks and shadow entities in the financial system. But let me stress what the task force really stress is that there is a big heterogeneity of risks across sectors, across countries. These risks are highly interrelated therefore it's important to have this holistic approach also in the policy responses and therefore a systemic wide analysis is necessary. We can't just look at each sector in isolation but we need to have a broader perspective and understand the monitoring going forward what is happening across the different sectors. So let me start with the first question that has already been a big debate I will be very brief on it, but we know that we have exceptionally low interest rate in the European Union, but I would say also globally, this decline did not start with the financial crisis, it accelerated with the financial crisis but it's something that actually started already in the mid 80s and I think this is important to keep in mind. So sovereign crisis, global financial crisis made this decline faster but it already started before. We heard that there are two views, two main views as to why interest rates are low and here we're talking about real rates. There is the financial cycle view and the secular stagnation view. The first one as we heard now by Claudio where he also contributed assumes that economic agents accumulated excessive debt in the period before the crisis possibly based on optimistic expectation of future returns. And as a consequence when something changed and the expectations are reviewed there is the need of extensive leverage, there is a dampening of investment and real interest rate and there is also a decline then in nominal interest rate because there is a recession and indeed monetary policy accompanies the recession by becoming more expansionally and reducing nominal rates. There is an opposite view which is more called secular stagnation that says that interest rates have declined not because of financial cycle factor but because of structural reason and in particular demographic development and decline in total factor productivity on the supply side and increased preference for scarce safe assets on the demand side. So what is the consequence of these views? Very different, there is an excess saving of investment and there are lower interest rates and downward pressure on nominal interest rate. Now as we heard before both views may have some merit in the current situation but what is very important is that they have very different implication for what we believe will be the future. So for how long we believe the interest rate will remain low or will at some point increase? So in the financial cycle view the idea is that the interest rate may be affected yes for a long time but not permanently. So as we heard by Claudia when cyclical factors vanish interest rate will increase again maybe not to previous level but will increase again. Whereas in the cyclical stagnation view effects are much more permanent so the interest rate have declined permanently and there is no return so that when cyclical factors vanish the rate will remain low there is not a going back. So in the task force given that we were given the task of addressing the implication of the low rate for financial stability we inevitably had to spend quite some times and several months where they voted to understand a bit better what was the likely scenario going forward because we had to have a working scenario within which to be able to assess the implication for financial stability. So what we did we consider two scenario one which called low for long what we call back to normal. In the first one we give indeed importance to structural factors in particular low demographic and productivity growth. In the back to normal scenario instead we think that lower interest rate are largely due to cyclical factor and therefore excessive debt and the need for the leveraging. And then we perform a sort of model based estimation and we perform most sort of analysis and we also look at the projections of other international institutions and we conclude that structural factors contribute substantially to the current low interest rate environment and that indeed the total factor productivity should accelerate enormously in order to rebalance back the interest rate to normal rate. So the conclusion was we try to abstain from what is more likely, less likely, precisely because we cannot really foresee the future but we try to stress the importance of the structural factors and therefore we work under the assumption that for prolonged period of time we may still see low interest rate. And this if you want to start in point was further supported by looking at the projection of the other international institutions in particular the IMF and the European Commission that shows a series of downward revision for the real GDP growth for Europe in recent years. So if we look at the last six years we have seen that the median real growth forecast have been revised from 2.7 to top point one by the IMF and from 2.4 to 1.8% by the European Commission. So also confident that the other institutions were also seeing that the current situation was prolonging we work under the assumption of low interest rate for the next future but also keeping in mind that when we assess the implication of financial stability it's the law for long scenario that is the relevant one because in the back to normal many risks will disappear and we will not have many implications for financial stability. So when we want to assess financial stability implication we have to put ourselves in the shoes of a prolonged period of time of low rates. And given this working assumption then we move on to think of what are the implication of the low interest rate environment for financial stability. And what we try to understand was yes the immediate effect but also the more long term effect the meaning what was changed what were the implication of the low rate for really behaviors of institutions behavior of markets and longer term processes. So then we saw that low interest rate of course put pressure on profitability of financial institution as we already heard. Particular for institutions like pension funds and insurance companies that have longer term return guarantees on liabilities and also on banks because despite the positive effect on cost of funding and other that come from low nominal interest rate there is indeed a substantial decrease in their net interest income. So this we had to acknowledge and we thought that on balance in the longer term if interest rate are prolonged for a long period of time there will be also pressure on the profitability of banks. And what we also then saw was that the financial institution started withdrawing from return guarantees towards intermediating unit link the product and indeed the result as we heard from Chairman Bernadine is that the risks aren't transferred from financial sector to household or more than risk I would say uncertainties uncertainty about what's going on but anyway the consequences of the current rate the low rate are transferred on the household because they cannot profit anymore from guaranteed products. But lastly but not least there is a low interest rate environment also are speeding up an important transition the financial sector and this is what we mean with more longer term effects. So what happening is that there is a declining role for banks so that there is more market based intermediation there are no bank institution that are entering into banking products like consumer credit or mortgages in particular we see that in the Netherlands for example. So we see that there is a sort of changing in business model both of banks that are trying to reach yields in some other form but also from non banks that are entering to bank business. So overall there is a decline in the diversity among financial intermediaries which may lead to important interrelation and correlations of risk going forward in the system. So what we conclude in terms of what are the risks that we see some of them we see already some of them we are more congested in the future. So there are three main categories of risks that follow from these trends that we see in the financial system. The first category is related to the sustainability of business model. The second to this broad based risk taking and the last to changes in the financial system structure. So relative to the first category with a risk related to pressure of profitability and solvency or pension fund insurance companies but also banks. Concerning to broad based risk taking there are risks related to potential real estate real asset price misalignment repricing because the search for yield is increasing the investment in higher yields but lower liquidity investment. There is a potential risk for risky balance sheet across the financial system. We see some banks in some countries in particular that start decreasing the lending standard for example but in general institutional tend to increase leverage. And finally there are risks related to changes in financial system structure in particular to shadow banking activities and this increase interconnections and correlated liquidity risk that we may see going forward for this lower diversity of intermediaries. But it's important to stress again that the low interest rate give rise to heterogeneity of risk across country. These risks are interrelated and therefore it's necessary to have a system wide analysis to address them. Thank you. Thank you very much Professor Carletti. I have to give two minutes at least to each member of the panel to react to the other interventions. So I start with Francois. Not more than two minutes for two quick remarks. A key element of our discussion is what is the important rate for the health of financial institution? Is it the nominal rate or the real rate? And here the answer is very important. For banks I think we agree on that. It's clearly the nominal rate and not the real rate. And it's important because as I said and as we thought that the practicability, predictability of the future is always difficult but it's probably easier for nominal rates. We will go in the direction of hikes accompanying the acceleration of inflation. This is for banks. For pension funds and here Gabrielle is the best specialist probably the picture is more mixed and real rates are very important. And so they are also of some importance for insurance. This is a very simple observation but I think it's very important for other panel. Nominal rates matter most for banks and real rates less. My second remark refers to an observation made by Claudio and here I agree about what you said some irony so to say that retail banking was seen as the most robust part through the crisis but it's now the one part which suffers most from low nominal rates. Which is true. I would draw a conclusion for this. The diversification inside banks is an adequate answer in the business model and the fact of having a diversified model with retail all sale specialized lending is some kind of protection against this risk. And this is an important element in the debate we had. I don't know if it belonged to the past about separation. Diversification can be some kind of protection against financial risk. Thank you, François. Gabya. Yeah, very quickly, two or three. First, and I don't want to enter into this debate of the financial cycle and secular stagnation. It's definitely not for me. But just one point on all of this discussion I think we should not underestimate the element of demographics and the importance that demographics can play. And especially with this element of course of saving and investment. If we look at what have been happening in Japan. You know, Japan is now with nominal decreasing in terms of population. And this has a huge effect in terms, of course, of the horizon of the people in the saves and investment pattern. So I think that that cannot be underestimated. Now, two further points on the issues also for financial stability. We are, as Professor Caletti said, we are working also, of course, on this low for long scenario. But back to normal, you know, hopefully one day we'll be there. I don't know if it is to the older normal, probably to a different normal. But just one point from my side, because I think that's very important from a financial stability perspective for insurance and pensions, is when interest rates will start to be increasing. And Victor mentioned, of course, the Fed and probably they will do something at the end of the year. Please go smooth. Don't do it, don't do it in a harsh and in a hurry. And, you know, and definitely not with huge ikes. You have been listened to. Definitely not with huge ikes, because that will have a devastating effect for the balance sheets of the insurers and pension funds that I was mentioning. And third point that I think we should also discuss more in terms of the stability of the overall financial system is the effects of digitalization. I think that we are underestimating clearly that disruption effects that this will have in a number of intermediation elements, you know. In the financial sector, including in insurance and pensions, definitely, there are a lot of frictional costs that will be, you know, overcome with digitalization. This will have an effect on the bulk, of course, of the entities that are working in these sectors. And it can have, of course, also financial stability impacts. So don't underestimate that also. We don't, but it's also a message for the established big financial institutions. They have to move into digitalization in order to reduce costs. And that is happening much more in the US than in Europe, particularly in banking. And so, indeed, part of the change in the business model has to do with a big reduction in costs as a result of digitalization. Yeah, an important point. But we need also to see if, where are the obstacles in regulation also to have a good balance between, you know, having innovation playing a role. Good point. Claudio, please. Thank you, Victor, very briefly. I was actually glad that you made those points because it allows the possibility for me to explain. First of all, two things, that we agree wholeheartedly on two points. The first one is that there is no issue of a financial boom in Europe now. Obviously, I mean, that's clear. The real issues that Europe and the financial system in Europe is facing are quite different ones, and we talked about them and so on in terms of the impact of low rates and so on. But from a global perspective, from a global perspective, if you look around the world, there are many parts of the world that are booming, where you have the same symptoms that I saw before, that we saw before the crisis, at least qualitatively. And this is why it's so important to take a global perspective, because the monetary policies in key jurisdictions, whether we like it or not, have a global impact, and the collective impact of monetary policies around the world has a global impact. So that's one point. Second point, we couldn't agree more, and at the BIS we have been saying this for many, many years, that the central bank monetary policy has been overburdened. And if we want to move to a more sustainable and stronger and balanced expansion, we need, indeed, a more balanced policy mix. Now, we may disagree precisely on what more balanced policy mix is, but I think we will agree on that point. Where I think we are, we do disagree a little bit, Victor, is... But just to clarify, has to do with, has to do... No, but this is a technical point, so it's not a big deal. Has to do with the issue of, when you said about the long impact of central banks on long-term rates, and so on. I think that we have to make a key distinction between what I would call the cross-section of rates at a particular point in time, which is what the yield curve is, and what happens to even the interest rate over time. So I think that there is no disagreement, I presume, that at a particular point in time, when you're looking at the cross-section of interest rates, so you're looking at the yield curve, central banks have a big impact on it, and they have a big impact through their asset purchases. That's precisely what they're trying to do, right? And then you have this expectational game between the central banks and the market participants trying to out-guess each other and so on. But of course, we have no guarantee that that game is taking us in a kind of right direction. Now, of course, then we have to see over time in terms of what the consequences of all that are. Now, but the non-neutrality of money, forget about the long-term rates and so on. Just imagine that you're in a world with a one-term rate. That's something about over time. And all I was saying is that if you believe that financial booms and busts create permanent output losses and very long-lasting impacts and productivity, and if you believe that monetary policy has an impact on these things, then it follows that it is not neutral. That's all. Yeah, I agree with you more. I agree with you more than you think. Oh, good. Yes, but I just had one point. What you said about boom and busts is also true about investment. And as monetary policy does, its cyclical role of helping the recovery and increasing investment, then also it has a long-term effect on potential growth. Conditional, and we agree on that too, Richard. Yes, so, and this is very important because we all know that this distinction between short-term and long-term is, in many ways, a theoretical one and a pedagogical device. When we use models, we talk about the long-term, but the long-term that is talked about in that perspective is more about a concept of logical time, not historical chronological time. And when we go to real historical chronological time, then the distinction between the short-term and the long-term is blurred by many things, investment, hysteresis, boom and busts, and many other things so that there is no clear distinction. But with the authorization of Francesco, whom I consulted with gestures, we have time to allow three questions from the audience, and I'm sorry that the richness of the interventions consumed the time we had for this session. Please, yeah. Yeah, a very short comment because you made the point, essentially, and then a question, really. The short comment is I agree with Claudio that monetary policy is not neutral in the medium term, in the way you define it. Now, I tend to agree more with your angle than your angle, meaning we do know that, actually, that in models in which you are close to the zero lower bound, you have multiplicity. No, there's one equilibrium in which it's very different actually to have some price flexibility with instantaneous price adjustment, but when you have some price flexibility, you have an equilibrium with high inflation, full employment, and so on, and there's an equilibrium with deflation, chronic, and so on, and you have Japan. So there is a role for monetary policy, for signaling and so on, of taking out of that equilibrium. There may be other concerns as well, but it's not good. The question is, I thought it was very important to distinguish these different interest rates, but I was surprised that one of the real interest that was not mentioned is the one that is relevant for real physical investment, which is probably even more important the distinction between nominal and real. Now, normally, that's not in the mandate of central banks because it's just some type of things. You say, okay, I care about the final rate. There is a risk premium. I move the benchmark and I control the stuff. But when you're as close to a zero lower bound, that logic doesn't apply anymore. In fact, the asset purchases programs, in a sense, is a way of going more directly towards that spread rather than the benchmark rate. It's a little different from longer.  How do you think about those parameters and what are you flexible about once you realize that what you have to control is a different rate than the one that you highlighted? Okay. I, Marcos, please. So mine is very similar to what Ricardo said. Essentially, what are the implications? We focused very much on the risk-free rate, but what are the implications for the risk premium? How does a lower interest rate affect the risk premium for financial risk and also for real investments? And I think that's very interesting. And is it conceivable that actually central bank thinks the task is to take out risk out of the system and redistribute the risk among nominal claim holders? So that's essentially one task to stimulate the economy. As a second thing I wanted to say just to the neutrality of money and super neutrality of money, I think in a model with financial frictions, you have immediately that this doesn't hold. Yeah, right. Yeah. There was a third, no? Okay. Oh, Paul, Paul. Yes, please, Paul. Thank you. Listening to your exchanges about what might be going on was fascinating. But is there a robust policy response that is invariant to what you think is going on?  And is that invariant over the summer's view, the Rogoff view, the Gordon view, and the Boreo view? And then the subsidiary question is if in the real world you can't get that and the stories do matter, and there is some positive probability that Claudio is right, how are you going to use regulatory policy to restrain the credit boom that could cause the problems down the road? Yeah, good cause because it's not ongoing. Yeah, but good questions. I will stop here, sorry, because we have really no time. We are already entering into the time of perhaps the next session. But I'll give the floor first to François to add a little bit. Sorry, sorry, because I will have to go. If not, I will miss my plane. So two very quick observations. Paul, about your point, just to clarify one thing. When we say that monetary policy should not be overrun or should not be the only game in town, usually we don't speak only about fiscal stimulus. We speak about structural reforms. This is obvious, but if you look at the general debate in the last three weeks, including by some international organizations, I think it's a useful reminder. And I come from a country where I wouldn't recommend a huge fiscal stimulus. Second, about risk premium and investment. Just a short notice and this is, I know a point I share with Victor. When you look at cost of equity, which is probably what you alluded to for investment, because it's probably the relevant rate for investment. When you look at it in Europe, at least, you have some things strange, that the no risk financing rate is much lower than before, about zero, but the cost of equity didn't diminish in the same proportion. So it means that the risk premium increased. We are not responsible for the cost of equity. It's a private data and quite difficult to follow. But this is an important element probably on the investment dearth, I mentioned. And we should think a bit more about it. Is it only a time lag, some hysteresis effect of the crisis, or is it something more durable of some kind of risk aversion from private investors? And you have more or less the same phenomenon in the US. If you look at the explosion of shares by back and extra dividends. So this is an issue we should all probably look at very carefully. It's not directly linked to monetary policy, but we should monitor. We cannot determine cost of equity, but it's a part of the debate, I agree with you, which is at present under-observed, if I could say it this way. And sorry for going. Thank you, Claudio. Just very, very quickly to Paul's point. In terms, yes, I think we're all searching for a more robust policy response, which is tries to deal with the possibility that these various views are correct. I think that we would all agree as was just mentioned that we need a more balanced policy mix. What would it be? I think that then there is where the disagreements start arising. How much fiscal room is there in various countries? And how much you can actually do or how effective structural policies are? I mean, at the BIS we tend to emphasize a lot the structural aspects because we feel that that's the best way of raising sustainable expansion. Fiscal can play a role as long as you have the necessary fiscal space. And then the questions arise as exactly what that space is. Particularly if you take this longer term perspective than we were talking about. On the other big issue that was mentioned, yes, there is this disconnect. There seems to be a big disconnect between risk-taking in financial markets and risk-taking in the real economy. And it's something that we need to look into closely. Having said that, there is also a, and that may have to do also with governance issues and so on that lead firms to purchase back shares with the proceeds of borrowing at very low rates as opposed to investing in real things. Now, if you take a global perspective actually, investment has not been that weak. Historically, if you look, there has been a trend in the investment to GDP ratio has been pretty stable globally. And of course if you take into account what's happened to the relative price of capital goods that you may even have been slightly drifting up. But of course, it has been very weak in advanced economies. And the question of globalization again, there is a key role here and we should not forget about it. It's a very important point and the point that requires more research. What is happening to investment? What are we talking about today when we talk about investment? Is it as in the past? So all the analysis of what the investment depends on and so on. Also, there is inertia because we know that other rates in non-financial firms that continue to be used are very high and that's perhaps just inertia. That all types of investors and decision makers in the private sector have not yet adjusted to the new environment of much lower nominal growth going forward and also lower returns on everything that shows in the other rates. That shows also in investors in banks that still dream of two digit ROEs and things like that in this environment. So Modelyani Miller is not really believed by those investors. So there is inertia after a big crisis as we had. On the question of Paul, is this sort of desired developments that seem to be common to both of us here at the table means that they are invariant across views? I would say so because this adjustment is just tweaking with the present policy mix. It's not a decision about the fundamental vision structurally about the future of advanced economies. So then the divergent analysis stays about that. And because indeed to address the issues of secular stagnation as presented by Robert Gordon, then we have to talk about different types of policies and things not these tweaking with a little bit monetary and fiscal. So that's why it can indeed be invariant to these more fundamental views about the future of advanced economies. And thank you very much. We finish here and we thank the panelists and the discussant. Thank you.