and our liaison with the banks, suggest that there are only a small minority of borrowers who will need to reduce their expenditure to service their loans when their interest - only periods expire. 15 sale of the property finally, some interest - only borrowers may have to consider selling their properties to repay their loans. difficult as that may be – most notably for owner - occupiers – doing so could free up cash flow for other purposes. it would also allow them to extract any equity they have in the property. the extent of that can be gauged by estimating lvrs from the securitisation dataset. 16 the lvrs of almost all of those interest - only loans ( both owner - occupier and investor ) are below 80 per cent ( based on current valuations and including offset balances ) ( graph 8 ). this reflects the combined effects of loan serviceability tests and the increase in housing prices over recent years. 10 / 13 bis central bankers'speeches some risks remain while the various estimates i ’ ve provided suggest that the aggregate effect of the transition ahead on household cash flows and consumption is likely to be small, some borrowers may experience genuine difficulties when their interest - only periods expire. the most vulnerable are likely to be owner - occupiers, with high lvrs, who might find it more difficult to refinance or resolve their situation by selling the property. currently, it appears that the share of borrowers who cannot afford the step - up in scheduled payments and are not eligible to alleviate their situation by refinancing is small. our liaison with the banks suggests that there are a few borrowers needing assistance to manage the transition. over the past year, some banks have reported that there has been a small deterioration in asset quality. for some borrowers this has tended to be only temporary as they take time to adjust their financial affairs to cope with the rise in scheduled payments. 17 for a small share of borrowers, though, it reflects difficulty making these higher payments. that share could increase in the event that an adverse shock led to a deterioration in overall economic conditions. conclusion today, i have discussed some of the risks associated with interest - only loans, which imply that their value as a form of mortgage finance has limits. i have also presented rough estimates of the likely effect of the upcoming expiry of interest - only loan periods. the step - up in required payments at that time for some

to project capital buffers that the banks would need under the two scenarios. as you know, unlike other countries that conducted stress exercises, we took the highly unusual step of publicly reporting the findings of the scap, including the capital needs and loss estimates for each of the 19 banks. 2 this departure from the standard practice of keeping examination information confidential was based on the belief that greater transparency of the process and findings would help restore confidence in u. s. banks at a time of great uncertainty. supervisors released the methodology and assumptions underlying the stress test first and then, two weeks later, the results for individual institutions. the results showed that under the more adverse scenario, 10 of the 19 scap banks would need to raise a total of $ 75 billion in capital in order to have the capital buffers that were targeted under the scap – tier 1 capital in excess of 6 percent of risk - weighted assets and tier 1 common capital in excess of 4 percent of risk - weighted assets at the end of the two - year horizon. the merits of publicly releasing firm - specific scap results were much debated within the federal reserve. in particular, some feared that weaker banks might be significantly harmed by the disclosures. in the end, though, market participants vindicated our decision. they appeared to be reassured for three reasons. first, the results were deemed credible by most market participants, owing in part to the release of details about our assumptions and methods, as well as the variation in assessment of the banks. second, the results were released at a time when uncertainty about bank conditions was very high, and some market participants feared the worst. that is, perceptions of tail risk were very high, and the scap results helped reassure market participants that under a severe but plausible scenario, the capital needs of the largest u. s. banks were manageable. third, the treasury stood ready to board of governors of the federal reserve system ( 2009 ), “ federal reserve, occ, and fdic release results of the supervisory capital assessment program, ” press release, may 7. make capital available to any scap bank with capital needs through the cap if they were unable to raise private capital. in retrospect, it is clear that the public release of the scap results played an important role in stabilizing the financial system, as has our supervisory follow - up on improving capital levels. by november 2009, the 10 banks that required additional capital had increased their tier 1 common equity by more than