Furthermore, real estate prices continued to rise but, as in 2013, momentum remained below the levels observed until 2012. Developments still varied widely from one region to the other. Whereas real estate prices in some regions hardly increased or even decreased, other regions continued to register significant price rises. However, it is still too early for an all-clear. First, the imbalances that have built up since the beginning of the low-interest-rate phase remain at a high level. Second, mortgage interest rates have again dropped to historically low levels in the past few months. And third, there are no broad-based indications of a change in the banks’ risk appetite. Mortgage lending growth at the domestically focused banks has also decreased, but is still markedly higher than overall market growth. Moreover, the affordability risk (loan-to-income ratio) in mortgage lending has continued to rise, interest rate risk remains at a historically high level, and interest rate margins have fallen even further, from a level which was already low. In these exceptional circumstances, banks should ensure that their resilience is high enough to be able to bear the risks taken, even in the event of a marked real estate price correction combined with an interest rate shock. The countercyclical capital buffer plays a significant role in this context by ensuring that banks hold additional capital as a buffer in the current situation. Adding to that, many banks have a surplus of capital with respect to the regulatory requirements. Such surplus capital is especially important under the current circumstances.

First, limits in expanding agriculture and industry sectors and the resultant hindrance of economic expansion. Second, in the current economic context, a greater emphasis has to be placed in not only expanding the services sector, but also improving its productivity in order to achieve higher economic growth. Let me elaborate on these two reasons in a broader manner. The economic history of countries clearly shows that there is a set pattern of the transformation of the structure of economies, typically from agriculture to industry and then to services. It happens due to two major reasons. First, in the first stage, the economic value was entirely created by agriculture, which is called the pre-industrial era. Thereafter, the source of a country’s economic value shifted to industry with fast  BIS Review 116/2008  1  industrialization. However, the value creation through agriculture and industry was constrained at a certain point as the performance in both the agriculture and industry naturally depends mainly on the natural resource endowment. Therefore, when the natural resource endowment of countries limits further expansion of agriculture or industry, a greater need for improving productivity arises. Second, when growth is limited due to constraints in agriculture and industry, the vacuum has to be filled with some other more efficient economic activity. Otherwise, the economy would be stagnant. Hence, the existence of an efficient and vibrant services sector has become a necessity for further growth of the economy as a whole and the agriculture and industry sector in particular.