financial stability and credit markets in europe : opportunities and risks in the current setting professor claudia m. buch ( deutsche bundesbank ) dinner talk at the second suddeutsche zeitung conference on the topic of “ private debt and direct lending ” frankfurt am main 18 september 2018 it is nearly ten years ago to the day that the global financial crisis reached its initial peak. the global economic crisis that followed was the most severe since the great depression. in the wake of the crisis, reforms to the financial markets were introduced with the aim of making financial markets more resilient, and many of these reforms have already been implemented. after all, the stability of the financial system is a key prerequisite for an efficient and dynamic economy. just as preventive medical care and a good immune system help to limit the effects of disease, a prudent approach coupled with good defences helps the financial system to mitigate the effects of economic shocks. the question today is how far the international financial system is better placed to deal with unexpected developments than it was just a decade ago. the global economy is currently fraught with uncertainty on a number of fronts. geopolitical tensions have escalated, and trade disputes have erupted, some of which threaten to tip into a trade war. in europe it is unclear under what circumstances the united kingdom will leave the european union. germany's economy may be booming right now, but every period of growth, no matter how long it lasts, ultimately gives way to an economic downturn. how well prepared is the german financial system to face a potential economic slump? what happens if risks materialise? with the global economy in good shape and interest rates low, risks can be underestimated. the world economy is currently doing well. according to calculations by the international monetary fund ( imf ), global growth will amount to 3. 9 % both this year and next year ( imf 2018 ). for the coming year, the imf is forecasting only a slight fall in growth from 2. 4 % to 2. 2 % for industrial countries and from 2. 2 % to 1. 9 % for the euro area. at the same time, the imf has emphasised that this growth is not without risk and that some risks are already materialising. for example, the debt level in some emerging market economies has gone up sharply in recent years, and these liabilities are often denominated in foreign currency. this has created vulnerabilities which have

surfaced in recent weeks and months. for example, the turkish lira has lost nearly 40 % of its value in the year to date, and the argentine peso as much as 50 %, or thereabouts. 1 thus far, market participants have regarded these issues as relatively isolated incidents. currently, the effects on global financial markets are small. but possible contagion effects and interactions with global risks are difficult to forecast. public and private debt, which are close to their all - time highs in global terms, are one of the global financial system ’ s vulnerabilities. industrial countries which bore the brunt of the crisis have seen public debt levels balloon, largely on the back of measures to shore up the financial sector. this has shifted risk from the private sector to the government sector. in many emerging market economies, by contrast, it is above all ( non - financial ) private sector debt that has increased. in fact, it has more than doubled in recent years. compounding this situation further, some of these sectors are highly exposed to currency risk. source : bloomberg, 14 september 2018. banking sector debt has generally diminished in recent years. measured in terms of riskweighted assets, the capitalisation of the banking sector at the end of 2017 stood at roughly 17 % in the euro area, compared with 14. 2 % in the united states. however, measured in terms of total ( unweighted ) assets, these ratios were significantly lower, at 5. 8 % in europe and 9. 3 % in the united states ( cgfs 2018 ). it should be noted that, due to the differing accounting standards, these figures are not directly comparable. in germany, banks ’ tier 1 capital ratio – i. e. tier 1 capital in relation to risk - weighted assets – has climbed from from 9 % at the start of 2008 to 16. 4 % at the start of 2018 ( chart ). the unweighted capital ratio, i. e. tier 1 capital in relation to total assets, rose in the same period from 3. 1 % to 6. 2 %. furthermore, capital adequacy levels sometimes vary significantly from one bank to the next. the tier 1 capital ratio of the large, systemically important financial institutions in the first quarter of this year stood at 16. 9 %, while the unweighted capital ratio came to 4. 9 %. for small and medium - sized banks, the equivalent figures were 15. 6 %