The Bank of Japan is implementing an intensive quantitative easing program and, similarly to the ECB, they include both public and private issues, but with a very important weight of public debt, which amounts now to more than 80 % of Bank of Japan’s total assets. The size of the Bank of Japan balance sheet represents now more than 75 % of the Japanese GDP. The provision of ample liquidity by Central Banks has contributed to restore financial market functioning in situations of severe stress and so, to support the economy. In the euro area, the effects of ECB actions are estimated to have contributed to reduce financial stress and fragmentation, easing financing conditions and helping to restore the credit channel. According to available estimates, all these developments have added significantly to inflation and GDP growth over the last two years. And, although quantitative estimates are surrounded by some uncertainty, it is clear by now that this battery of monetary policy actions have reduced the likelihood of very adverse scenarios. In due course, a need to restore more normal monetary conditions will arise, although its precise timing is impossible to predict and will depend on the cyclical situation of each economy or monetary area. This normalization process may create a scenario of monetary policy divergences, in which there maybe unexpected exchange rate movements and communication is very relevant.
The combination of macro challenges and regulatory reforms: The current and forthcoming financial landscape for banks I will comment now on the financial landscape for banks and the regulatory reforms. The prevailing low-interest rate environment may pressure banks’ interest rate margins downwards when the negative impact on the interest rate differential exceeds the positive effect of low interest rates on banks’ activity. This potential unintended consequence of monetary policy lies in parallel with other factors that are putting pressure on banks’ profitability, in particular, regulatory reforms aimed at addressing vulnerabilities in the global banking system as well as deficiencies in the current framework. BIS central bankers’ speeches  3  Some of these reforms have already been implemented and banks have improved their resilience. Solvency ratios have been reinforced with a new calibration of the requirements and the definition of the eligible capital instruments for the numerator of these ratios. However, different problems in the denominator related to the measurement of risk still persist and should also be addressed. In this regard, I would say that the major general outstanding issue to finalize the Basel postcrisis reforms is how to mitigate the unwarranted variability in the risk weighted assets that are calculated by banks when using internal models. This revision should be feasible by striking a right balance between sensitivity, simplicity and comparability. There is a special focus also on avoiding significant increases for overall capital requirements.