has addressed this point as part of a macro stress test conducted on small and medium - sized institutions, which simulated various paths of interest rate movement. an abrupt interest rate increase and a flattening of the yield curve are the scenarios which would weigh most heavily on banks ’ net interest income. this is attributable to term transformation. the strains caused by a rise in interest rate would particularly lead to a stability problem if other macroeconomic risks were to materialise simultaneously. banks need to equip themselves to deal with this by ensuring they have adequate capital buffers. developments in this regard are positive. for instance, german banks have improved their resilience by raising new equity and retaining earnings. the visible overall drop in the tier 1 capital ratio is attributable to the stricter regulatory requirements of crd iv and the crr. since we began carrying out our basel iii impact study in 2011, the average common equity tier 1 capital ratio of the largest german banks has risen to 9. 3 %, almost doubling. please allow me to outline an additional aspect of the banking system ’ s current situation. global regulation and european supervision are contributing to the level playing field that has been called for and which is necessary. but this also means that german banks are increasingly facing up to international comparison. in its most recent global financial stability report, the imf warns that, in terms of return on equity and return on total assets, german banks languish well below average in both an international and a european comparison. german banks lag far behind their foreign competitors in terms of the diversification of their earnings, in particular. effectively, this means that the german banking sector needs to press ahead with the expansion of noninterest income as a percentage of total earnings in order to be able to hold its own when competing for clients and investors in the long run. bis central bankers ’ speeches in the past months, banks have cleansed their balance sheets of many legacy issues and strengthened their capital base. the measures taken thus far to strengthen resilience are very much to be welcomed. however, german banks are by no means “ out of the woods ” yet. so where should the focus of such efforts be placed? on the one hand, with regard to improving resilience, risk provisioning always needs to be brought into line with the prevailing economic environment. on the other, methods of further increasing capital levels, for example by retaining profits, need to be explored. german banks

envisaged subsequent path of future short - term interest rates and, ultimately, on the expected level of the terminal rate, and if so, how? there are two broad ways in which central banks can increase transparency around the future path. the first is to publish policymakers ’ projection of the future path of short - term interest rates conditional on the macroeconomic outlook. 14 the second approach is to broadly maintain within the confines of current practice, which is geared towards explaining in more detail the central bank ’ s reaction function and to communicate policymakers ’ conditional expectation of the likely future pace of policy adjustment. the key difference between the two approaches is, hence, the level of precision with which policymakers are willing to communicate their future policy inclinations. the first approach is by no means uncharted territory in the central banking community. a number of pioneering central banks, led by the reserve bank of new zealand in 1997, regularly publish numerical interest rate forecasts to reinforce their inflation targeting commitment, very much in line with modern monetary theory. 15 the experience of these central banks shows that there have been many instances where guidance on the future path has been successful in coordinating disperse market views. 16 but 6 / 11 bis central bankers'speeches there have also been instances of stark and persistent discrepancies between the path expected by market participants and that published by policymakers. 17 some academics have resolved this impasse by arguing that the optimal degree of transparency depends on the central bank ’ s ability to forecast the economy. 18 put simply, transparency around future policy intentions is likely to be welfare enhancing if the central bank has established a convincing track record of systematically beating private sector inflation forecasts. but neither the private sector nor central banks have been particularly good recently at predicting inflation. more, even a well - established projection track record may not be enough to tilt the balance in favour of publishing a path for future policy – mainly for four, largely interrelated, reasons. first, it is often more important how central banks communicate than what they communicate. back in 2004, alan blinder already pointed out that a monetary policy committee that releases dispersed views could cause a “ cacophony ” in communication and ultimately create more confusion than clarity. 19 indeed, i believe that one reason why the ecb ’ s enhanced forward guidance has been so effective is precisely the fact that it represents the governing council ’ s unanimous view. for a large committee to agree on an entire path of future policy rates is, however