Finally, let me also address the risks of overheating in some parts of the financial markets. We do not currently see compelling evidence of overstretched asset valuations at the euro area level, but we do see that real estate dynamics or high household debt levels in some countries signal the risk of increasing imbalances. Such risks also exist in the Netherlands: they relate to the continued very high level of household indebtedness and the low level of mortgage collateralisation. For this reason, we share the concerns expressed in the warning issued by the European Systemic Risk Board in November 2016 and recognise that there is a case for mitigating measures. That being said, monetary policy is not the appropriate tool for addressing local and sectoral financial risks. Rather, targeted macroprudential policies, which can be tailored to local and sectoral conditions, are the right answer.1  The way forward Against the backdrop of a recovery that is becoming increasingly solid, the benefits of our policy clearly outweigh potential side effects. Also due to the pass-through of our monetary policy, there is now more and more evidence that economic growth is firming and broadening. Incoming data confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished. Nevertheless, it is too early to declare success. Underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend.
It therefore benefits households in their capacity as workers, entrepreneurs, investors, borrowers and taxpayers. Similarly, there are several channels through which our policies affect pension systems. Yes, lower rates increase the present value of future liabilities of pension schemes. However, the liability side of pension schemes is only one part of the equation. What happens on the asset side is also important. And our monetary policy has had a beneficial impact on this side of the equation as the value of the investment portfolio has increased. Also, let’s not forget that our monetary policy supports pension systems indirectly by supporting employment growth and thus pension contributions. In any case, it is ultimately up to sound governance structures and longterm strategies to ensure the financial health of pension systems. Equally, monetary policy can have an impact on bank profitability through various channels. Our assessment is that so far these effects tend to largely offset each other in aggregate terms. Low rates might reduce bank profits through the narrowing of net interest margins. Yet, at the same time, by supporting the recovery, accommodative monetary policy reduces delinquencies and defaults, including on mortgages. Improved credit quality coupled with higher lending volumes and an improved market value of assets supports bank profitability. Of course, depending on the strength of their balance sheet, some banks may be more affected than others. Also banks facing structurally high cost-to-income ratios or limited diversification of income sources might have to revamp their business models regardless of the low interest rate environment.