transformation – though this means that they are exposed to risks that require sound risk management and strong supervision. 3. we need public discourse on the role of banks in the transformation process and what is expected of supervision and regulation. 1 the economy is undergoing structural change which is impacting on the real economy and financial sector alike. german and european banks have emerged fairly unscathed from the episodes of stress in international markets in march 2023. bank profits have risen recently, and capital and liquidity ratios are stable. [ 2 ] since the global financial crisis, stricter regulation has been implemented and supervision enhanced ; in particular, we have a functioning single supervisory mechanism ( ssm ( single supervisory mechanism ) ) in the european union. in recent years, we have adjusted the focus of supervision in order to address risks even more effectively and to identify problem institutions at an earlier stage. [ 3 ] but banks have most certainly also benefited from the extensive fiscal and monetary policy measures of recent years, which have absorbed shocks. the sound situation therefore must not detract from the fact that vulnerabilities have built up in recent years. after many years of stable growth, low inflation and low interest rates, banks ’ risk provisioning had fallen sharply. credit risk was low. the economy has since been hit by severe shocks. inflation and interest rates have risen significantly, and uncertainty is high. interest rates have already gone up by more than we had assumed in past adverse scenarios. supervisors have therefore taken action to mitigate the impact of these vulnerabilities. interest rate risk is a key priority. around two - thirds of the institutions supervised by the bundesbank are required to meet additional capital requirements in order to counter higher interest rate risk. deposit rates currently still stand at an average of 0. 22 % [ 4 ] and have thus risen less sharply than central bank policy rates. if deposits were to be shifted out of low - interest sight deposits into higher - interest time deposits, this would reduce banks ’ interest margins. off - site supervisors urge the institutions they supervise to model interest rate risk conservatively, for example by assuming an average maturity of less than five years for deposits without a set interest rate fixation period. the results of the eu ( european union ) - wide stress test conducted by the european banking authority ( eba ( european banking authority ) ) and the ecb ( european central bank ) ’ s parallel ssm ( single supervisory mechanism ) - wide stress test will also provide further insights into

over a very long distance. and competition in the banking industry is becoming increasingly tougher and more international. not only competition for customers, but also competition for investors. global regulation and european supervision are creating an international “ level playing field ” in which investors will put their funds where the returns are greatest. german banks are therefore increasingly being forced to face international competition. and they are not performing all that well. in the current issue of its global financial stability bis central bankers ’ speeches report, the imf notes that return on equity in the euro area is low compared with that in other regions such as the united states or asia. 1 german banks are underperforming the rest of europe, too : in 2013 their return on equity, at 1. 26 %, and return on assets, at 0. 06 %, were both below the european average. a recent study has concluded that currently only 6 % of germany ’ s banks even earn enough to cover their cost of capital. 2 a business model which is relatively dependent on interest income is the main culprit for these weak earnings. in a protracted phase of very low interest rates, this imposes a particularly severe strain. at the same time, commission income and net trading income are insufficient to provide adequate compensation. given these factors, german banks would be well advised to rethink their business models and to gear them towards the objective of sustainable profitability. however, the imf sees germany as being more towards the bottom of the international rankings with regard to overhauling business models. there is yet another important aspect to profitability : if the circuit is clogged with runners, they will get in each other ’ s way. mergers could therefore be beneficial, particularly in the german banking industry – the focus here should, of course, always remain on achieving a sustainable business model. to sum up : in the comprehensive assessment, german banks demonstrated that they are robust enough to withstand even severe stress but have to increase their profitability in order to cross the finishing line at the front of the pack. 3. stability – much progress already made but a good deal left to do however, investors are not only interested in banks ’ profitability but also in their stability – and the same is true of us supervisors, of course. and when measuring a bank ’ s stability, capital is still the crucial factor. the stress test has shown that german banks are sufficiently capitalised even in a very adverse scenario – after all, the german banks that were