This is low in relation to other countries and makes households vulnerable to an interest rate increase that is higher than currently expected. Compared with losses on loans to the enterprise sector, losses on loans to the household sector were low during the banking crisis at the end of the 1980s. Despite high real interest rates and a decline in income, households were largely able to service their debt. High interest expenses and a decline in income, however, forced households to reduce consumption. This led subsequently to lower turnover in enterprises and weakened profitability and debt-servicing capacity. In this way, households contributed to an increase in banks’ losses on loans to the enterprise sector. The higher the household debt burden, the stronger the potential spillover effect from the household sector to the enterprise sector. The effects of weak economic developments and/or a change in interest rates on financial stability will depend both on the initial situation in households and enterprises and on banks’ ability to absorb losses. An analysis presented in Financial Stability 1/04 showed that a sharp increase in interest rates and a subsequent fall in house prices may increase banks’ losses to 2.5 per cent of gross lending. This is roughly half of what losses were at the beginning of the 1990s. The moderate increase in loan losses is due primarily to an improved financial situation in the enterprise sector. Banks’ capacity to absorb loan losses depends on their results and their capital adequacy.

standardisation in cards, payment innovations, a migration end date, and the governance of payment issues at the European level. 4  BIS Review 74/2009  Harmonisation in the field of retail payments is a natural area for efficiency gains. However, the market is moving only slowly in this direction. Although SEPA continues to be a mainly self-regulated project, some elements might need more regulator involvement. The Eurosystem has emphasised that a realistic but ambitious SEPA migration end date is necessary. Such a date would facilitate communication and provide more certainty for all stakeholders. The most viable option for achieving an end date is through regulation by the public authorities. Since an EU regulation is probably the most effective option the Eurosystem appreciates the Commission’s launch of a public consultation on this topic. Only by tearing down the walls of fragmentation can we ultimately bring about harmonisation, efficiency gains and a level playing-field. Such a development inevitably leads to increased competition. I am fully aware that it is not easy – especially in a period of low growth and higher credit risks – to change revenue models. However, those who invest early will benefit and position themselves successfully. Corporates tell us that they would benefit from SEPA services because they are internationally connected. Taking into consideration the renewed relevance of retail payments, the key success factors in the years ahead will be harmonisation, innovation and increased competitiveness. Banks and infrastructures will successfully take up these challenges only by continuing to play an important role in retail payments.