Since these instruments can absorb losses in the event of difficulties, their interest rates upon issuance are usually higher than those of ordinary debt instruments, so there is much more room for them to decrease, particularly in comparison with deposits. Analysis of the average loan-deposit spread, in terms of outstanding balances, shows that there is indeed a historically positive relationship between this variable and the level of market interest rates. However, since 12-month EURIBOR turned negative in February 2016, not only has this spread not narrowed, but it has actually widened. There are three reasons for this. First, average loan remuneration has been underpinned in recent years by the decline in non-performing loans, which has lowered the proportion of loans that do not generate any interest. Second, banks have to a certain extent rebuilt their portfolios, focusing more on business such as consumer lending that provides higher net interest income, albeit at the expense of increasing the risk profile of their credit portfolios. Third, in February 2016 there was still some room for a further decline in the cost of deposits which averaged 0.35% for outstanding balances and 0.20% for new business. Since then deposit rates on new business have fallen by an amount similar to the decline in average loan remuneration. However, the cost of deposits is currently very close to zero, so it will be more difficult to pass through any further falls in loan remuneration.
Some European countries have also provided bilateral financial support. Third, the private sector, represented by the foreign banks active in the region, has by and large maintained its exposure to the region, helped by the informal forum known as the “Vienna Initiative”. By avoiding a large-scale uncoordinated withdrawal of cross-border banking groups from Central and Eastern Europe, a systemic crisis in the region could be avoided. BIS central bankers’ speeches  3  Finally, the ECB is also making a key contribution. For example, by providing extensive liquidity provision to parent banks established in the euro area, the subsidiaries of those banks in Central and Eastern Europe are indirectly benefiting from this ample liquidity. Ladies and gentlemen, let me draw to a close. I am sure that the three aspects of convergence that I have mentioned will be better understood thanks to the discussions, which will take place during this impressive conference. Achieving sustainable convergence requires the conduct of sound economic policies, both before and after adoption of the euro. The present global crisis is demonstrating, once again, to which extent continuous resolute sound macro policies are the best way to improve economic and financial resilience in times of unexpected challenges and shocks. Thank you very much for your attention. 4  BIS central bankers’ speeches