In this respect, from the standpoint of income statements, credit institutions have limited room for manoeuvre. Nevertheless, they should avoid imposing indiscriminate rules on customers when they grant new loans; further, they should select borrowers more cautiously and appropriately differentiate the interest rates applied to each of them. Against this background of moderate lending growth and higher loan loss provisions, it does not seem that fees or gains on financial transactions can offset the pressure on the income statement. First, as I just mentioned, because it is unlikely that growth rates will be very high in this more sluggish economic environment in which financial market difficulties persist. And second, because, even if they are, given the weight of these items in income statements, they would be unlikely to act as offsetting mechanisms because of the sheer size of the pressures mentioned earlier. The most effective course of action, and that on which institutions' efforts should focus, is operating expenses. And homing in on operating expenses means not only limiting their growth, but should also lead to reducing those expenses which, because of their nature, are more variable. It is essential to exercise utmost care in taking on overheads, which are difficult to reverse. At a time like the present, it is preferable to have flexible cost structures which enable greater room for manoeuvre. The effort needed is formidable, and will undoubtedly require operating structures to be accommodated to the new competitive reality of the sector.
From a medium-term perspective, and even when conditions are established that will free up the flow of credit from the banking sector to the  4  BIS Review 52/2009  real economy, it cannot be expected that rates of expansion will rise again to the heights of recent years. The de-leveraging process underway in the banking sector, and in the economy in general, is not a passing fad, but rather a means of achieving lower and more sustainable debt positions. One way of making up for the lower rates of credit expansion, and thus countering the foreseeable narrowing of net interest margins, would be to diversify banking activity into new business segments. In principle, diversification is a positive thing, but it must be undertaken with caution. Experience shows that both in Spain and internationally, only on limited occasions can an institution's sound knowledge of its core business be directly transferred to activities that lie further afield. Accordingly, those in charge of institutions should show prudence and avoid what can be termed contrived diversification processes and carefully assess their entry into unfamiliar market segments in which they lack experience. Second, in the short term bad debts will keep rising and so the pressure on loan loss provisions will continue to be high. It is true that the reduction in interest rates will bring relief for households and firms and help to limit the impact of the rise in bad debts, but the contractionary phase of the cycle will foreseeably last some quarters.