As a result, profitability stemming from the maturity transformation business may come under renewed pressure – not least as retail household deposits tend to be bound at zero. Furthermore, should downside risks to the economic outlook materialise, higher loan loss provisions may further compress bank profitability. Accommodative monetary policy has greatly supported bank profitability in past years. In fact, conventional and unconventional measures have improved the quality of credit overall, thereby 2/6  BIS central bankers' speeches  reducing provisioning needs. Our measures have also increased the demand for loans, which has more than offset the negative effect of compressed margins. Furthermore, structural factors are also weighing heavily on euro area banks’ profitability. In an environment where cyclical factors may exert further downward pressure on bank profitability, banks would need to step up their efforts to overcome structural challenges. Such measures may include cost reductions – including lower staffing costs and streamlining of branch networks, enhanced digitalisation – implying initial, one-off large-scale investments, revenue diversification and the reduction of the stock of non-performing loans in the six countries where levels are still high. A number of regulatory and policy measures could help to improve the institutional setting in which the banking sector operates and facilitate banks’ efforts to adjust their business models. Such measures should include completing the banking union (in particular the establishment of a European deposit insurance scheme), the subsequent removal of the remaining non-harmonised national options and discretions, and making progress with the capital markets union.
One latest development is the amendment of the Banking (Capital) Rules last year, which brings the current synthetic securitisation rules fully up-to-date with the Basel rules. These products are commonly found in Europe over the last five or six years. Banks in Asia-Pacific are now starting to take note of them as a useful tool for credit risk mitigation and regulatory capital management without having to transfer their portfolio assets. This feature is extremely useful to help overcome typical constraints such as loan assignment and confidentiality restrictions. Such products can offer an additional investment opportunity for institutional investors. 14. When the new capital rules become effective in June this year, the full spectrum of synthetic securitisation structures will be available for use in Hong Kong. For example, the use of special purpose vehicles (SPVs) as providers of guarantees or credit default swaps, which is a common structure for synthetic securitisation products, will be permitted subject to relevant criteria1. It effectively lifts the headroom for growth of the synthetic securitisation 2/4  BIS central bankers' speeches  market here. 15. Earlier on, I briefly touched on the HKMC, which is a wholly owned subsidiary of the HKMA. I should also elaborate a bit more on its role in promotion of securitisation in Hong Kong. 16. One of the key business mandates of the HKMC is to develop securitisation and other financial products that contribute financial stability and facilitate the development of the local financial markets. 17. Throughout the years, it has been a trailblazer in different areas.