We are, above all, interested in the question of whether banks are sufficiently capitalised in view of the aforementioned vulnerabilities, and are able to maintain their economically important functions such as lending despite incurring losses. Our stress tests confirm the relevance of the aforementioned vulnerabilities. They show that banks would suffer substantial losses in the event of an abrupt and steep interest rate rise combined with declining real estate prices. Affordability risks would materialise, meaning that numerous borrowers would no longer be able to pay their mortgage interest. Furthermore, many mortgages would be insufficiently covered, i.e. the mortgages concerned would no longer be fully secured by the value of the properties. In such a scenario, the capital ratios of numerous banks would drop below their target values and, in some cases, even below the regulatory minimum requirements. Equally, our stress tests underscore the importance of the capital buffers currently held by banks, which comprise voluntarily held buffers besides the capital required by statutory regulations. With these capital buffers, our assessments suggest that most banks would be capable of absorbing potential credit losses. In other words, we consider the resilience of most banks to be adequate. Current situation requires vigilance  Ladies and gentlemen, the fact that we consider banks’ capitalisation to be sufficient at present does not mean that we can relax with regard to the vulnerabilities on the mortgage and real estate markets. That the current situation is not more precarious is due not least to the measures taken in recent years (cf. slide 5).

At the onset of the crisis, it was not clear that the pandemic would not lead to a slowdown. This can, however, be explained in retrospect. Interest rates have remained low and support measures have significantly cushioned the impact of the crisis on the income of households and companies. Data released since the publication of our report in June show that the price momentum is continuing unabated. Second, it is to be expected that the global low interest rate environment will remain unchanged for some time to come. One reason is that the structural factors behind the downward trend in interest rate levels over the past decade, such as the ageing of the population and the decline in productivity growth, are still in play. Another reason is the expansionary monetary policy pursued by central banks in the advanced economies. Such policy continues to be necessary in order to counteract the impact of the coronavirus crisis. It is therefore to be expected that interest rates will remain low for some time yet, which means that incentives for increased risk-taking will remain in place. 13 This could prolong the period in which growth in mortgage volume and residential property prices is higher than can be explained by fundamental factors. Moreover, the longer the current cycle lasts, the more likely it is that memories of past crises fade and that market participants increasingly disregard the risks in question. Against this backdrop, it is important to continue to closely monitor developments on the mortgage and real estate markets.