certain extent, a natural consequence of the function they perform in the economy, but is also a strategic decision in some cases. there are two main factors behind the income squeeze. first, higher - yielding legacy loans are maturing and being replaced by ones generating lower returns. second, profits are falling because the spread between short - term and long - term interest rates is currently relatively narrow. added to this is the fact that deposit - based funding is significantly less attractive than it once was. the reason? while market interest rates continue to dwindle – even dipping into negative territory for some shorter - term maturities – the fierce competitive environment makes it very difficult for banks and savings banks to pass negative interest rates on to retail customers. corporate clients, too, are anything but thrilled by this idea. we can therefore conclude that profitability is exceedingly weak among german banks and savings banks, even by international standards. that ’ s nothing new, but the low - interest - rate environment is exacerbating the situation. 2. 2 no silver bullet in sight but in the current situation, reversing the slow downward trend and putting income back on a more sustainable footing is no easy task. broadly speaking, banks have five levers that they can use to increase their profit margins. let ’ s briefly go through these five options and examine how well they would work in the current climate. the first lever is to utilise interest rates at the short and long end of the yield curve. typically, the interest rate on an investment will rise as its tenor increases. so banks can boost their returns by issuing longer - term loans or making longer - term investments. we are currently seeing this effect in germany in the case of mortgage lending. up until around three years ago, long - term mortgages – that is to say, those with terms of more than ten years – made up around 30 % of new business. by the end of last year, the share of long - term mortgages had already crept up to around 45 %. however, this move comes with two disadvantages. first, if banks use short - term funding but lend over the long term, they could run into difficulties as soon as interest rates rise again. longdated, mark - to - market assets would then lose value, while funding costs would mount on the liability side. in a nutshell, institutions would be exposed to heightened interest rate risk. second, 2 / 7 bis central bankers'speeches since long -

so they argue – could create market distortions and large risks for the eurosystem ’ s balance sheet. the eurosystem is taking this criticism seriously. however, it should be duly noted that, throughout the difficult times of the financial and sovereign debt crisis, the broad collateral framework was regarded as a great institutional strength of eurosystem ’ s monetary policy. while the pledged collateral has successfully protected the eurosystem from financial losses, at the same time the collateral framework has been flexible enough to preserve the eurosystem ’ s ability to support market functioning and provide liquidity to the banking system in times of stress. the eurosystem thereby fulfilled one of the core functions of a central bank. 3. 2 regulation as is apparent from the agenda of this conference, regulatory issues have become a crucial factor in financial markets, cropping up in almost every agenda item. in the aftermath of the financial crisis, national and european regulatory initiatives alike have mushroomed. in a nutshell, the regulations involve stricter rules for capital, stricter provisions for risky transactions, and higher administrative burdens. at the bundesbank, we are fully aware of these strains and the potential drawbacks of regulatory requirements. liquidity in the bond and repo markets has decreased, also – but not only – because of new regulations. moreover, the higher required capital ratios will increase banks ’ cost of capital while banks ’ earnings are currently compressed. this is making it difficult for banks to raise further capital, which is why they may respond to regulatory requirements by deleveraging. this, in turn, may well have negative effects on market liquidity. at the same time, it is evident that well - designed regulatory measures will help make the financial system more stable. the ultimate aim is to make financial markets more resilient and crisisproof in the future. higher resilience will restore market and customer confidence in banks. this 5 / 7 bis central bankers'speeches is intended partly make up for the higher costs of capital and allow banks to attract more customers and funds. in the long run, a stronger capital base can be expected to enhance banks ’ loan origination capabilities. these are thus positive effects of regulation which need to be recognised. i am convinced that we need effective and well - targeted regulation. this also means that we need to closely monitor all effects – intended and unintended – and consider making adjustments, if necessary. but even if targeted adjustments are made to the regulatory framework, i believe