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partner no sign of banks taking greater risks since the end of 2002, mortgage claims have recorded annual growth rates of up to 6 %. this is quite substantial compared with the rather moderate trend in real estate prices. it appears that the expansion of mortgage claims has not been driven so much by real estate prices, but by the number of loan requests. consequently, the growing demand for loans is more likely attributable to factors other than the expectation of a speculative boom in real estate prices. the crucial question is the following : is the higher demand for loans due to excessively harsh competition among banks that has led to cheaper credit not reflecting the actual risks incurred? how has the relatively strong growth in mortgage loans impacted on bank risks? to answer this question, we took a closer look at the banks ’ risk behaviour. several indicators led us to believe that banks have hardly engaged in excessive risk taking. while it is true that interest rate margins, i. e. the spreads between mortgage rates and the banks ’ financing costs, had fallen slightly by mid - 2005, other bank expenses declined at the same time. in the final analysis, therefore, the profit margin was virtually constant or even slightly higher. the profit margin corresponds to the difference between the interest rate margin and the total operating expenses expressed in percent of the loan volume and – to reflect expected risks – of total value adjustments and provisions. the banks ’ profit margin thus also serves to cover unexpected risks. given that the profit margin has remained constant or moved slightly higher, the banks ’ risk - taking capacity has not diminished in spite of pressure on interest rate margins. this presupposes, however, that the banks have made realistic value adjustments and provisions. we currently assume that this is the case. moreover, average lending limits for mortgage loans have changed only insignificantly and may be regarded as cautious. for instance, the proportion of low - risk first mortgages – i. e. those mortgages with the lowest lending limit – is over 90 %. the criteria used in extending loans can also be rated as conservative. as a rule, assessments of a debtor ’ s future solvency are based on considerably higher interest rates than the current ones. mortgage debtors should therefore be able to meet their liabilities even if there is a marked increase in the interest rate level. our analysis focuses on system - relevant banks and on different groups of banks. we rely on aggregated data and on a random sampling of banks or groups of banks. problems with