 It's a great pleasure to be here. We were just overland joking a little bit when I approached the building. I saw a lot of journalists going in and out, and I thought, well, this is exciting, when the vice president of the Bundesbank comes and we have all this media presence around. And then I noticed, well, I actually noticed on my way from the airport that there's an election coming up, obviously, everybody. And this is what we talked about overland. Everybody's interested in what's happening with regard to Brexit, what are the impacts on the Irish economy. So I'm sure you have lots of very important things on your mind, and I'm not going to talk about any of these things. I must apologize because I want to give you a little bit of an insight into what's happening in Germany in economic terms and also what's happening in the German financial system and more specifically with regard to financial stability. So you may notice that, like I think the Irish Center Bank, we have an important role for financial stability, for surveillance of risks in the financial system. And this is rather new to us. We have a long history over decades of the Bundesbank, and this new mandate was given to us in 2013. So it's a new task, a new mandate, and I would just like to walk you through our analysis of it. So let me start. This is way too small. You won't be able to see what I want to show you here. But let me explain. Just to give you a bit of an overview of what the German financial system looks like because financial stability, as you know, is really about the system. It's about the financial system delivering its services to the economy, and we want to make sure that these services can be provided even in times of distress. So it's all about resilience of the system with regard to shocks and its understanding how financial instabilities can come about because you have large firms that are important for the entire financial system, or you have a high degree of connectedness, or you have exposure of individual financial institutions to the same type of risk. So that is why we have to understand the whole system. And this chart is taken from our financial stability report, and it's just highlighting what the German financial system looks like and what are the main linkages in the system. And you basically, if you could see it, the print is rather small. But what you're basically seeing, if you just take this column here and this row, and these are the monetary financial institutions, so mainly the banks. And they dominate the German financial system. I will show you another slide, which makes that even more clear. So we recently had an interesting discussion with the Bankers Association, the Trade Association. They said, well, why do you always focus on the banks when you talk about financial stability? Well, because they are so important for the German financial system. That's why. So the banks are very important. The households have very traditional savings products. They're also highly exposed to the banks. Life insurance is an important topic in the German public discussion, also when it comes to low interest rates. I won't talk about these issues because they're not at the core of our analysis right now. But that's also an important part. And of course, Germany is highly linked. And these are these orange bubbles. The German economy and the German financial system is highly linked to the rest of the world. That's why also international financial linkages, and obviously also Brexit. So that's why I found the lunch discussion very interesting. It's very important for the German economy. And so let me just highlight a bit more what these international linkages mean in the financial sector with regard to Ireland, because obviously the German financial sector is also closely linked to Ireland. And what you see here are the assets and liabilities of German financial institutions in Ireland. And I think what's interesting is if you just look at the recent numbers, this is about 2%, 3% of the total foreign exposures of the German banks. That might look small. But if you look at where we were coming from, it was much bigger. So there was a much larger exposure of the German financial institutions with regard to Ireland. And then you saw a continuous decline for the liabilities. And the assets have kind of a hump shape. And you clearly see the effects of the crisis. So this, I think, is interesting in and of itself. I won't talk about more detail here. But maybe that's something which is interesting also to analyze going forward. As I said, the German financial system is highly bank-based. So we did some analysis looking at the centrality of different types of financial institutions in the financial system. Because assets and liabilities and the linkages, that's one thing. But of course, it also matters how individual institutions are linked to other sectors, how those sectors are linked to the rest of the economy. So we try to get more of a sense of what are these linkages and what is it really important that we should be focusing on. And not very surprisingly, you also see, and that's the orange dot here, that again, in terms of this more sophisticated centrality measure, the banks are, again, very important. So that's why most of what I'm going to say is about banks. But some of the issues that we have in terms of vulnerabilities to financial stability risks, they're also very relevant for other financial institutions. Before I go into that, I would just give you one chart with the institutional framework. So how do we organize financial stability, financial stability, surveillance, and how is this institutionalized? And I would be interested in hearing whether it's similar in Ireland or not. So this is the organization of our financial stability committee that's a new committee that, as in many other countries, was put into place and the legislation was put into place after the crisis. It's chaired by the Ministry of Finance, so up here. The Bundesbank has three representatives on the committee and BAFIN, which is the Federal Financial Supervisory Authority. So it's a shared responsibility. As you all know, financial stability can have distributional implications. Decisions have to be taken that require public accountability and that need to be discussed in parliament. So I think it shouldn't just be the central bank, the independent central bank that is in charge here, but it's really about also political accountability. So what does the Bundesbank do then in this committee where we basically provide the analytical input? This is not to say that the other participants don't have anything analytical to provide to the committee, of course, but we have a big staff in the Bundesbank department that deals with these financial stability issues. And then based on these analytical inputs and our discussions, we give warnings and recommendations to national policymakers and I will explain later on what we have done so far. So what does the committee do? What do we do in terms of surveillance of cyclical risks? Well, obviously one of the discussions that was very important for the committee in the past years was what does it mean that growth has been weakening in Germany? What does it mean for the financial system going forward? And maybe I should just remind all of us that talking about risks to financial stability and cyclical risks is not about business cycle movements in the data, but it's really about talking about extreme events, what are potential extreme events that are unexpected, that have not been forecasted, and how could they threaten the stability of the financial system. But for that, of course, you have to understand whether the drivers generally about really economic activity. And here's basically what happened in Germany over a longer period of time. So this starts in 1992, so you see the crisis, obviously. But I just want to focus here on the last episode, like let's say the last decade or so. And one of the features of that last decade was that it was exceptionally good. And that's something I will refer back to as I go through my talk. So we had 10 very good years. And the risk that we are seeing is that, as we all know from our day-to-day experience, if we have experienced a very good period, we might lose out of sight that also negative risks might happen, negative scenarios might not be in our risk assessment going forward. So the question is, how good are the risk assessments going forward of the financial sector and of all market participants? So growth has slowed down, as you can see here, quite considerably over the last year. There was also, we had quarters with negative growth rates, so there was talk about the potential recession. What our economists are saying now is that we are, when it comes to recession, we are out of the wood, so to say, so we have low growth, 0.5, 0.6 last year, and that's also the forecast for this year. There's no risk of a recession in our baseline scenario, so in that sense, it's good news, but it's also not very strong growth, and then for the years to come, we're probably gonna grow at capacity. But what is baseline underlying assumption of that forecast is that exports are going to stabilize, because what you also see here is that the reason why we came in with a positive growth rate last year and also then this year is that we have very strong domestic demand exports in and of itself have had a negative growth contribution because Germany is so interlinked into the global economy. Domestic demand has proven very resilient, we have a strong labor market, we have full employment, we have a lot of scarcities actually showing up on the labor market, a skilled workers, scarcity of skilled workers going forward is a big issue for the German firm. So, exports down, domestic demand resilient, also because of good financing conditions, that's the overall macro picture that we're in. The second ingredient from the macro side that is important for our work on financial stability risk is the low interest rate environment and also the market forecast of low rates to persist for a longer period of time. And this is a chart I'd like to show for a German audience, you're probably all aware of it, but interest rates have declined globally. So these are government bond yields, you would see it in many other indicators. There's sometimes a bit of a German discussion that seems to suggest that this is a feature of the German economy or the Euro area, but of course rates are low everywhere so we have to understand the drivers. And of course taking these two things together so exceptionally good growth rates over a decade, expectations of low rates that remain low, nothing is forever I guess, but for a long period of time, that really makes us thinking about what are cyclical risks building up in the German economy and I want to show you the three issues that we have been highlighting in our financial stability report. So the first is the underestimation of credit risk. Given that we had a very good period of time economically and we're still not in a recession so growth is low but relatively stable, what does it mean for credit risk assessments of market participants in particular the banks? The second vulnerability that we have identified is the potential overvaluation of assets in particular real estate and that's obviously closely linked to the low interest rates and then the risk of course in terms of financial stability is that these risks are correlated so they're not entirely independent and they might get magnified in the financial system and interest rate risk is one feature of these risks and I will come back to that as well. So these are the vulnerabilities, again I'm not, everything I'm going to say is not that the scenarios that we are looking at are highly likely but they are not entirely unrealistic scenarios. So the question is what's going to happen? What is the exposure of the system to these vulnerabilities if shocks materialize? A shock would be an economic downturn which is stronger than expected. It could be a rise and a hike in interest rates so if risk premier rise on financial markets as we've seen in previous episodes of global uncertainties. So these could be the risks going forward where we see exposure of the German financial system and I'm sure that other financial systems have similar issues here and then the question is of course we can't entirely avoid risk, we don't want to avoid risk because that's part of the growth dynamics that we want to see but how can we make sure there's sufficient resilience against these risks? So let me first explain what these risks are, how we try to measure them because you can't, these are lots of things you can't observe directly so you need indirect indicators and then what we do about it. So coming back to these 10 good years or it's even more than 10 good years because if you look at these numbers which are the non-performing loans in the German banking sector and the insolvencies in the corporate sector, you see they've been on a trend decline over the past 10 years at least. You could extend this line and you would see that these indicators have been trending downward also over the past almost 20 years. So lots of improvement, good news, lots of good credit worthiness in the German corporate sector. Not very surprisingly you're seeing these trends also being reflected in the risk provisioning of banks. So risk provisioning of banks has been on a decline, write-offs have been on a decline simply because the corporate sector has been performing so well. The question is of course the underlying risk assessments and also talking about risk assessment going forward are these two optimistic? So do we see that risks are being underestimated going forward? And again, this is something that we can't measure. We can ask people how optimistic are you or what are your risk assessment going forward and we don't know what are future fundamentals so we don't know what to compare with so we need some indirect indicators and one of the things we looked at are the risk weights in banks' internal models. And here I always want to stress that this is about financial stability, macroprudential surveillance so here I'm not talking about the usability and usefulness of risk weights for micro supervisors and for the buffing for example but I'm talking about what can these risk weights because they're basically based on banks' internal model the risk ratings that banks generate internally what can they tell us about risk assessments of these institutions so they allow us to peek into a little bit the decision making and the risk assessments. And so what do we see? I guess again no big surprise. Also these risk weights have been trending downward. Of course the models are based, calibrated on data of the past years so the past years have been very good so that means also the risk weights are trending down and there might be an issue if going forward risks are going to be higher if these negative scenarios materialize then these risk weights might be underestimating the risk going forward from the perspective of the financial system and I explained that in a second what that means. So before we peek a bit more into what's happening in banks' credit portfolio so who gets credit and what is the distribution in there? Let me say a bit more about credit growth in the financial sector. And what you see here is again a very long timeline this is starting in the 1980s and what I would like to draw your attention to is here the orange line is again GDP, GDP growth which you see as kind of tapering off but here the blue line that's credit growth so these are growth rates and you see that credit is growing quite dynamically despite the slowdown of GDP so the latest growth rate has been about 5% so that's even if you subtract inflation this is a relevant number and it's pretty stable and it's trending upward so the business cycle has slowed down but the credit cycle, the financial cycle is still very active. So why is that peaking into the structure of credit, of lending? Let me just highlight this area here we want to understand what's driving credit growth? Is it demand? Is it supply? We have interesting results from the banks so when we ask the banks and ask why are you lending so much one of the responses they give to us is why because the German market is very competitive so we have a three tier structure we have savings banks, we have cooperative banks we have the large international banks and there's a lot of competition which is of course good for the consumers they get good rates and good conditions but it's of course one of the reasons also why there's a lot of lending ongoing. A second feature is that the construction sector is heavily relying on credit so and we have a shift in the composition as I told you earlier away from external demand towards domestic demand and within domestic demand of course the construction sector is very important so and they are borrowing that's part of their financial structure and that's one of the explanations why here we see relatively strong growth so this is just a growth rate of credit that you're seeing here and of course we had periods with even stronger growth of credit also with higher inflation rates this is the time also of the reunification period I come back to that when I talk about the real estate market because there's also some interesting observations there but just focusing on this area here growth in credit and the construction sector plays an important role. Now we wanted to understand what does this mean for the structure of banks loan portfolio so do we see a shift to better firms because overall the corporate sector is doing better as we've just seen or do we see kind of deterioration in credit quality so again peeking into this credit growth a bit more closely and we basically find two things one is that overall the improved credit worthiness of the firms the good performance of the corporate sector is also reflected in banks loan portfolio so what we've done here we've looked at the interest coverage ratio which is of course given that we have low interest rates it's moving into a favorable direction and we have it here for 2002 and for 2017 you could take more years you could extend the time series a bit you could look at other indicators the picture would be fairly similar and what we're seeing is that we're seeing the mass of the firms moving to the right so the firms that are getting loans credit from the banks they're better they're performing better just reflecting the overall better performance of the economy but as the overall performance of the corporate sector has improved of course some of the firms have also moved to financing through retained earnings profitability has been fairly high so some of them don't actually need bank credit anymore some of them have also moved to the market so they use market based sources of finance so what's happening in bank portfolios well overall we have better firms that get credit but we also have a shift in the allocation of credit to the left again this is not saying that the banks are doing anything wrong so each individual loan looks healthy because the firms have improved but it's the relatively riskier firms in the portfolio of the good performing firms that receive bank credit so from a supervisory perspective and also from the individual loan perspective this looks fine the question is of course what's happening if we enter into this unexpected downturn in one of our risks and scenarios for financial stability well then we might have banks being more vulnerable to the weaker firms in the economy because then the whole distribution of firms would again shift to the left and then we might see problems popping up in the risk portfolios and the credit portfolios of banks and this is something which we label allocation risk so the allocation has moved to the relatively riskier firms this is not visible in the data yet because we're still in relatively good periods of time economically but it may show up this vulnerability to a negative shock may show up in times that are less good let me move on to overvaluation of assets and loan collateral another risk, another vulnerability that is prevalent in a scenario with low interest rates when all the valuations are comparatively high and I guess nobody in the room knows exactly what's the right valuation and what's the right long-term interest rate but of course that's an effect you see across many asset classes I'm just gonna talk about real estate because that's the focus of our analysis right now before I do that a brief comparison again apologies for the small print but a brief comparison to Ireland so I also used the opportunity of coming here to learn more about the Irish economy and of course I don't have to remind you what the risks and the social costs and the economic costs are that can be associated with a bubble on real estate markets and when you look, I mean you just have to follow the line so the orange is the Irish line the blue is the German line so from this perspective Germany looks very innocent so there's no, there hasn't been a strong hike in prices so the upper left-hand corner this is prices then the right corner the upper line's row is credit and then down here you have the you have household debt so again just follow I mean this without being able to read the graphs you can get the message so Germany looks very benign in comparison to Ireland maybe just one interesting fact which is also not known to or not reaches a level of awareness in Germany very often of course when we talk about bubbles on real estate markets everybody would talk about Ireland but actually Germany had its had its weaknesses on the real estate market and here I'm talking about the reunification period so the 1990s remember that I showed you the strong credit growth in that period so we had, after reunification we had a shortage of good departments and also real estate commercial real estate in East Germany so there was a lot of investment going into that area a lot of tax incentives and then we basically created a bubble on the real estate market a lot of employment went into the construction sector prices increased and the price increases basically stopped in the mid 90s so then people moved out of the construction sector and prices fell now we still have a lot of empty apartments actually because there was an oversupply being created so this was also strongly driven by tax incentives so it's not that Germany is entirely immune you didn't really see the real consequences of that real estate boom in East Germany and the aggregate figures because the overall economic performance was better so the decline of that market the shrinking of that market happened not in the context of the global financial crisis like here but in a more benign economic situation so we're now certainly not immune and that's why we're paying close attention also to the real estate market right now so if you discount how Germany looks compared to Ireland and if you just look at the German data then the indicators are actually sending quite a mixed set of signals so the upper left-hand corner these are price increases on the German real estate market and we had high growth rates over the past years in particular in the larger cities and of course there's also reflecting changes in preferences so people want to live in larger cities they're moving away from the rural areas and so in order to understand to what extent is this an excessive price increase misaligned from fundamentals we have to do good economic modeling to somehow try to capture also these preferences our economists are doing that so they basically have a model with a lot of regional data they try to understand what's the impact of income per capita and of the regional economic development and if they do that they come out with a number of about 15 to 30 percent overvaluation of assets of real estate and housing assets so that's a number which hasn't changed over the past years but that's a sign that we do have some overvaluation of assets in this particular area the next question you ask yourself well if this is all financed by people's own wealth and income and it's all financed by equity capital maybe then it's not so much of a risk of a credit driven spiral of real estate prices so how about credit going into that market segment and I've shown you some of the evidence earlier actually quite strong growth in credit going to the housing market going to the real estate market but then the piece of evidence which makes us a little bit more relaxed about this market and which also is the reason why we think that we don't right now need specific macro potential tools being used for the real estate market is that and now I'm coming again to the numbers you've seen in comparison to Ireland household disposable income is rather flat and there's no strong dynamic in household sorry, household credit relative to disposable income so that's one of the things that we are of course looking at but taken together we think that there's no immediate need to act with regard to macro potential instruments but we're doing very close to surveillance we do a lot of surveys also and a lot of interaction with the banks because we think that there's a potential for loan collateral to be overestimated the two needs for action that we currently see on this market is that one, data gaps need to be closed I guess economists and analysts always say that data gaps need to be closed and then of course those who have to report the data say well, but it's costly for us to report and so why do we have to do this? Well, the reason is because we have very limited data on things like lending conditions borrowing conditions on real estate markets we have some aggregate statistics which you can find on the Bundesbank homepage many of this comes from private sources so and this is good data so no issue about data quality but of course if we want to understand what's happening in this market what are the distributional consequences where pockets of vulnerabilities building up we need to have more granular data and we have to have it from our statistical reporting system so we had this discussion for a long time now so that was one of the actions that the Financial Stability Committee took to issue a recommendation to close these data gaps and then the ESRB the European Systemic Risk Board also recommended to us that we have to close these data gaps and now there's a consultation of a new piece of legislation which would enable us to collect more data so we are on good track now but it took a while and then we have now a macro-prudential toolkit so in principle the micro-supervisor the BAFIN is also the macro-prudential authority so we could use LTV ratios and amortization requirements in case our risk assessment would change for this market we don't have borrower-based instruments so debt service to income ratios for instance we don't have so we think that that gap or this missing item in our toolbox also has to be closed let me say one more word about what we know about this market and why we are right now don't think that we have something like a self-enforcing narrative on this market in terms of prices growing and credit growing and that's new evidence that we have from surveys of households so I briefly mentioned surveys of banks so we are also asking the banks what do we expect in terms of price changes in the real estate market they expect rising prices households also expect rising prices but there are two trends which make us a little bit less worried and still in this observation mode namely the following so when you compare price increases that households expect in rural areas and in urban areas then you see that they expect higher price increases in the urban area so just to take the one-year expectation 6.7% expected price increase in the urban areas compared to 3.7% in the rural area so it's not that they expect huge price increases overall but they differentiate and they take these changes and preferences into account also when you ask them what do you expect for the next year versus five years from now they expect a higher price increase over one year period lower for a five year period so these are things which make us think that this is somewhat linked to fundamentals and they don't expect ever rising prices but it's a close call and that's why we keep watching very closely the final piece and it's actually linked to the real estate market that I mentioned is interest rate risk so a lot of this lending on the real estate market is going through the smaller mid-sized banks the savings banks the cooperative banks so they have a very high market share and mortgage lending but that's a general feature of the German real estate market most of these mortgages are fixed-term mortgages which is good for the duration of the contract of course for the borrowing household but it's exposing the banks to interest rate risk and what you see here is the share of mortgage loans with a fixed rate for 10 years and this has gone up it has doubled from about 20-25% in the early 2000s and now it's at around 50% and of course this is something that the micro supervisors are very much aware of and they're doing a lot also to increase the resilience of the individual banks against this risk the concern we have here is that there are a lot of banks in particular the smaller banks which are actually very important for the German financial system the banking system that have exposure to the same type of risk so we basically took all these three vulnerabilities as we call them together underestimation of credit risk over-variation of assets and interest rate risk and we call this cyclical risk and we discussed very intensively what should we do to address this cyclical risk and what's the need for action so basically it took us let me do the math right three years to discuss this and we started basically with our analysis so in our financial stability reports of 2017-2018 we highlighted this risk and we also intensified our communication then of course we discussed in parallel we discussed these issues also in the financial stability committee and we decided at the end of 2018 to hold a press briefing on cyclical risk and also to announce that the appropriate policy tool as we think is the counter cyclical risk buffer so just in short what the counter cyclical risk buffer is doing it's not an additional capital requirement for the bank but it's a capital requirement that varies over the cycle so it's increased in good times and it can be lowered in bad times to give more breathing space for the entire sector because what would happen otherwise if you have this unexpected shock that I talked about if you have that hitting the banks, the economy then of course the capital requirements be imposed by the market or by the micro regulator would be tightened and would become very binding so we are in this bad economic situation where all of a sudden the shock hits and capital requirements increase because that's when the risks are actually being realized well, what can the banks do? They can't profitability will be squeezed in such a situation so they can't just use retained earnings to increase their capital they also can't go to the market because everybody wants to go to the market at the same time so all they can do is deleverage so they can shrink their asset side to make sure that the capital requirements are being met and basically the counter cyclical capital buffer is like a tie break in a situation like this so we discussed this and then we announced a counter cyclical capital buffer of 25 basis points so that's way smaller than Ireland we're going to see in a second and the banks have fun until this year to comply with this day I mean it's not binding at all for the German banking sector so in that sense what you can actually see from the data we haven't seen any pro cyclical effect quite to the contrary the credit cycle is still in pretty full swing so what you see are the financial cycle what you see and what is what is really and that's part of the discussion we had obviously where now we're moving into a period of weaker growth how can you activate the counter cyclical buffer and of course the response to that is that what matters is the credit to GDP gap and that keeps on rising and right now also the indicators are pointing upwards so we will certainly have a discussion on this also going forward I mentioned Ireland I mentioned the counter cyclical buffer in Ireland and again something for your good eyes or getting new glasses if you can't read it I will explain to you so this is the buffer rate that is basically this counter cyclical buffer is calculated there's actually a formula and equation giving in the piece of legislation telling us how to calculate the buffer I think it's one of the rare incidences where you really have a rule-based policy tool but of course there's also room for discussion and so this is the buffer guide and here you have Germany France is a little bit higher and Ireland is up here so let's see what the future will bring for us so just briefly summing up so I discussed the counter cyclical buffer which as we think is strengthening the resilience of the system and also it's aim is to stabilize landing in periods of stress of course we're also talking and I'm happy to answer questions on any of these other topics we're also discussing a lot other risks more structural risks to the German financial system one is obviously and I think these are discussions that many others have also happened in the Euro system and I'm sure there's also a discussion here how about climate risks how can we account for climate risks in the financial sector again for the sake of time I won't go into details but I guess it's clear that we need and also for this type of risk we need sufficient resilient and sufficient buffers the final piece I want to mention is that I think our real economies are in structural change with different structures different issues that matter but I think also the financial sector is in a period of structural change and you just have to mention words like fintech and big tech and then it becomes clear what is happening in the financial sector and I think the financial sector is important because it's at the core it's so central to our economic systems and that's why we have to make sure that also the structural change in the financial sector works well and what then people usually say is well what is structural change where structural change is about entry into a sector but it's also about exit from a sector can we make sure that these shampoetarian dynamics are working well and we've done a lot in the financial sector sometimes I'm surprised that of course it's known for experts but many who are not expert to these I must admit sometimes complicated policy discussions are not so aware of we have new tools for the resolution and the restructuring of financial institutions and we can use those tools also to help the restructuring and now comes my advertising block if I may because there's currently a big evaluation ongoing in the financial stability board this is the acronym here FSB and evaluation of the too big to fail reforms of the past 10 years which are basically which are about a lot of things higher equity capital and systemic financial institutions but also about these regimes for resolution and resolvability of financial institutions so there's a working group working hard on these evaluations I have the privilege of chairing that group and we will issue a consultation report in June 2020 and I would invite all of you who are having views on this having done research of this coming from different parts of society to look at this and to give feedback because I think it's important we all know that too big to fail is an issue which ultimately can have costs for the taxpayer but if we are solving addressing the problem that can have huge benefits for society so and here I stop both with my talk and with my advertising block thank you very much