If we look at what has happened in the last decade or even before, we had interest rates close to zero in the Euro zone since 2012. Since 2014, we had zero interest rate or even negative rates, and that was caused by massive liquidity operations by the Euro system, the European Central Bank, and the balance sheet of the Euro system quadruplets since 2010.

So why did the ECB do this? First of all, there was very low growth in the Eurozone and there was also the fallout of the sovereign debt crisis. And so the ECB decided also because of lack of political action, that it's the only game in town to provide stimulus to the economy. And as you know, the Eurozone economies are very heterogeneous.

Now, at the same time, the ECB was very much concerned over fragmentation of the Eurozone. So the ECB looked after sovereign yields for the Eurozone member countries, not to diverge too much. This is what is called unconventional monetary policy, but it was in part done before. So this is not necessarily very new, but what was new is that normally inflation sets in constraint for these operations because if you do too much inflation shoots up and you are facing an incentive to dial down. And that did not happen. So we had very low or even deflationary tendencies for many, many years. This also allowed for very large stimulus packages when the covid crisis hit. So when we look at this, there wasn't term for that. It was not the new monetary order, but it was the new normal or low for long. So we got the impression, or some people got the impression this can last forever.

What happened? The economy levered up more and more debt. There was no differentiation of risk, there was no structural incentives to reform economies and also no pressure underperforming countries. And that hit an inflection point in 2021, inflation increased. Everybody at that time was thinking, this is temporary, this is going to go away. But actually by 2022, nearly all of us have finally received the conclusion that this is not a short-term effect. It's really a structural change. And in many parts of the Eurozone inflation even reached 20%. If you look for instance, at the Baltic countries.

So this is the point where the ECB and other central banks came to realize that they need to sue something about it and they started a massive hiking cycle. Now the issue, and now we come to the new monetary order, is not the current level of interest rates. If you look at history, even in the Eurozone, we had similar rate levels in the early 2000s after the, the Eurozone was just created. And also in 2007, 2008, just before the great financial crisis.

However, what is new is that we had a hiking cycle that was very short, very sharp, unexpected, and also synchronized across economies. So that was for the financial sector nor very high. And this hit in an environment of very, very high leverage across the economy. And now you have a lot of pain and you also have like, with a drug addict, withdrawal symptoms that we need to manage.

If you look at the financial sector, they by design hold very long dated assets like mortgages, bonds, and they have been low yielding because they were originated in a period where their interest rates were very low. But at the same time, they also have very short term funding like site deposits. And they were actually also asking for it in an environment with low or negative rates. So now banks getting squeezed from both sides. So first of all, on the asset side you have these mark to market effects where valuations are impacted by the rate rises.

Banks being exposed to unrealized losses, they need time now to rotate their balance sheets and if they don't get that time, but things are going to happen like we've seen in the SPB scenario. It also means that banks and also other financial institutions, because of this gap, are constrained in their agility, what they can do in the medium term. And they can't also really protect themselves against it because buying protection is expensive and would also, if you have a protection buyer, you also have somewhere protection seller. So, this means the risk would go somewhere else in the financial system. And finally, on the deposit side, right now, commercial banks pay 0% or a bit more on deposits, whereas they get 4% ff they put deposit money at the ECB. This is clearly reversal that can't go on that way. This is not going to last and clients today are price sensitive. They will move deposits if banks do not pay up.

The environment that we are facing right now is that money has gotten a price. Again, interest rates have been rising and if something has a price, you need to take decisions. So we as an economy and also the financial sector as part of the economy, need to take choices where we put our money. What has come to short in the last 10, 15 years of ultra-low interest rates is really putting money where growth is. So we saw asset bubbles in the real estate sector where you have high overvaluations in some of the economies. We saw banks financing a lot of mortgages which are perceived low risk, which don't yield that much. And in particular they don't bring the economy forward. We saw sovereigns or governments spending a lot of money on say things that covered problems but did not bring the economy forward. And now that we have a price tag on money again, I think the key advice would be really to take choices and to put the money there where you have a growth effect and also where you're able to generate positive returns.

So when we look at say, sectors, where this is the case, we need to look at corporate lending because companies, they create innovation, they create jobs, innovation jobs, earnings in theend can generate tax receipts and so on. And also we have lots of financing demand in the area of innovation of the economy, greening the economy and so on. We need to really put the money there. We have real returns that are generated. So that's the advice for the economy and the financial sector in particular.

If we look at more short term issues, I think, as I said, we are currently facing these withdrawal symptoms and withdrawal symptoms always create pain.

I think where banks need to put more focus on is really management of the treasury book, making sure that they prolong their funding profile to have more stable deposits or stable funding. This obviously increases cost, but then also lending side, our banks need to make sure that they put their assets there where returns are generated that are exceed the funding cost.

Also, what we could think about is that in the banking sector in Europe, there are still a lot of structural issues. So we have certain countries which are overbanked, where returns are depressed simply because of a lot of supply of banking services. At the same time, given the way that the EU banking market right now works, is that cross-border banking activities are not promoted or perhaps even discouraged by regulation that prevents banks from achieving scale as achieving efficiency. And that is in particular important as banking itself is a business model under transition. We have been talking about technology, AI and so on. And being able to make the investments to leverage these opportunities requires investments of a scale that most likely only the bigger players are going to be able to generate. And here we need to make sure that scale is is possible. Whether this means larger banks, not that sure, I mean we also need to make sure that we have a competitive environment, but also for the smaller players, they need to find a way to be able to benefit from the technological advantages to make first of all their model more efficient. But also if we, for instance, look at AI in in risk management or decision making, it allows financial institutions as many, many other companies in the medium term to make better decisions. And this is something that we need to make sure that this can be applied.

The competitive advantage for these technologies is not in the financial sector, is with technology companies. And I don't need to mention any names who is right now perceived to be leading in AI or machine learning, but banks or financial institutions in general are not mentioned, at least in the, in the broad press.

Banks or financial institutions in general will need to find a model on how to cooperate with the large technology providers in a way that they still continue to own their business. So that is I think a strong challenge for these firms, for the financial firms and something they need to put focus on.