I could go on, but allow me to focus on just one of the core topics which the banks – and we – have to deal with: non-performing loans, NPLs for short. Most NPLs are legacy issues. European banking supervision has, so to speak, inherited them. It’s a major problem that we have to tackle – or rather, the affected banks have to. For them, the non-performing loans weigh on profits; they require provisioning, and they are a constant drain on banks’ human resources, which could be put to more profitable use. And NPLs undermine trust – to what extent do markets trust a bank with a balance sheet that is considerably impacted by NPLs? In other words, non-performing loans make the affected banks weaker and keep them from lending to the economy. Banks which manage to forcefully address this legacy can focus on the future and attract new investors and new business, instead of forever having to look to the past. These banks can do their job: finance the economy. That makes it imperative to sort out NPLs. And there has been quite some progress on this front. Since 2015, significant banks in the euro area have brought down their non-performing loans by almost € billion; from € billion to € billion. That said, NPLs are still too high in parts of the banking sector. That is why banks have to act. And times could not be better.
2 Financial stability has great significance for monetary policy There is no doubt that financial stability has considerable significance for monetary policy. Monetary policy largely acts via the financial markets and if these function poorly, monetary policy will have less effect on the economy and on inflation. Problems in the banks can also lead to problems in granting credit in general in the economy and thus to lower demand and lower inflationary pressure. But the effects on unemployment, growth and other aspects of the economy can be substantial, even if this does not extend to a full-scale financial crisis. If imbalances linked to credit-granting and asset prices build up that are unsustainable in the long run, there is a risk that the economic downswings will be deeper and more prolonged. 3 Given the links between the areas, there are arguments in favour of monetary policy taking into account risks linked to financial imbalances. This is actually nothing new. Such arguments were put forward even before the financial crisis, although the debate then concerned “bubbles” on the stock market or property market. Some said that monetary policy should react to such sharp rises in asset prices, over and above the impact the upturns have on the prospects for inflation and economic activity.