loans. this is typically rationalized by arguing that lenders ’ liability maturity - profile is short - term and, therefore, it is only prudent that lenders make either short - term loans, or long - term loans, which involve frequently resetting interest rates depending upon the evolving market interest rates. while prima facie this rationalization may seem unexceptionable from the point of view of lenders, on a more incisive analysis, it turns out that, in the medium to long term, it is neither in the interests of borrowers, nor lenders. this i say because a floating - rate loan typically transfers interest rate risk to borrowers who, unlike lenders, are far less endowed, in terms of expertise and capacity, to hedge and manage interest rate risk every which way one looks at it. in other words, such floating - rate long - term loans effectively substitute interest rate risk of lenders with potential credit risk in terms of creating potential non - performing housing loans. of course, lenders might still argue that in some, or most cases, housing loan borrowers might prefer a floating - rate loan to a fixed - rate one. but then, it is precisely where the reserve bank of india ’ s guidelines with regard to customer appropriateness and financial literacy and credit counseling, enjoined upon banks, come in. this is because typically an unsophisticated, and uninitiated, borrower may be driven largely by the prevailing lower short - term interest rates, almost completely oblivious to the potentially higher interest rates over such a long time horizon, as, say, 10 years, or more. at another level, a fixed - rate loan has more certainty both for borrower and lender and should, therefore, be more prudent one to make. 4. in support of my above proposition, i would like to cite the us example. in the usa, housing finance is pre - dominantly of the fixed - rate long - term mortgage variety with an embedded call option in favour of borrower to pre - pay, and refinance, mortgage should interest rates decline during the maturity of the mortgage. this structure makes housing more affordable to small borrowers as they enjoy either a fixed - rate, or a lower rate. of course, the option premium is built into the fixed - rate of mortgages in the way of a higher rate. however, during the low interest rate environment in the usa up to the end

but in the treaty it is nevertheless clear that the ecb can conduct monetary policy by means of asset purchases. and yet the germans are still concerned. they are rightly concerned about the possible side effects of qe : the creation of asset bubbles and reduced incentives for countries to initiate reforms and reduce their debt. however, the response cannot be to ask the central bank to internalise these unwanted consequences. we have a narrow mandate. instead, we need strong prudential policies and, in terms of fiscal policy, the strict application of the stability and growth pact. but was it necessary to humiliate the bundesbank? no such thing occurred. there was unanimity in the governing council that asset purchases are a legitimate monetary policy instrument. and then we discussed when to use it and whether the situation was bad enough to decide to use it. we will really try hard to explain that what we are doing is in the interest of the euro area, germany included. bis central bankers ’ speeches in your book, you talk about the isolation of the central banks. do you feel that strongly at the moment? central banks are independent, but they are not isolated. in europe, however, we need a coherent approach across monetary policy, fiscal policy and structural reform policy, as emphasised by president draghi at the jackson hole conference ( at the end of august [ ed. ] ). the understandable instinct of the governments is to respond to their voters. this is never easy and it becomes even more difficult in an environment of low growth and high unemployment. but our plea to the governments is to always remember europe ’ s common interest, because the actions of one affect all the others. that is why they must be coordinated. do you feel more mature, at the ecb, after last thursday? this is not about being mature, but about providing the right answers to a new situation, as the ecb has always done throughout the crisis. now, with asset purchases, we are like the other central banks, but with an instrument that is adapted to our specific environment, i. e. an environment which does not foresee a common fiscal policy. we are conducting qe in our own way. bis central bankers ’ speeches