about potential risks. problems could be encountered, first, by borrowers drawn in by the low interest rates who financed their property for short lock - in periods, with low repayments, or with very high debt service payments relative to their income. rising interest rates alone are putting a strain on these borrowers. add a significant uptick in unemployment and the problem could spread. and if you then throw a slump in real estate prices into this cocktail – in other words, falling prices for the collateral securing mortgage loans – things might get expensive for the banks. real estate loans are just one source of risk, though. loans to enterprises are another potentially mounting risk factor. up until recently, firms were still benefiting from low interest rates and a strong economy. but now, with the onset of inflation, we are seeing an upturn in costs and interest rates and, what is more, an economy that is likely to slide into recession. this will probably make it more difficult for enterprises to service loans. let me spell it out again : these are all risks. time will tell which of these risks will actually materialise. so far, credit defaults have been the exception ; the ratio of nonperforming loans on german banks'balance sheets is still low overall. but you can't simply project the current situation into the future. that's why we have to keep a very close eye on all the key leading indicators. thanks to comfortable capital buffers, german banks are certainly stable overall. that's a finding that is backed up by our latest stress test among small and medium - sized institutions. even in the stress scenario, the banks still emerged with a common equity tier 1 capital ratio of 14. 5 %. that is reassuring, and – without wishing to blow one's own trumpet – it is, of course, also one outcome of regulatory reform. so as gloomy as the outlook might be, we don't need to worry much about the banks just yet – but we can't sit back and relax, either. there are three things that matter now. the first is that banks preserve their capital base and build up adequate provisions for risk. the macroprudential measures we introduced at the beginning of the year can 3 / 4 bis - central bankers'speeches help here. these measures mean that bank capital will be preserved and built up in the future. these measures were appropriate at the beginning of the year and they still are today – there is no reason

right now to make any adjustments. that can change, though – especially if losses erode the capital base to such an extent that lending might become overly constrained. the second thing is that banks should not hesitate for a moment to admit to any deterioration whatsoever in credit quality and recognise it on their balance sheets – it has been said once before and i'll say it again : transparency is trumps. the third is to keep an eagle eye on the loan book at all times. the current triple whammy – inflation, recession, and the turnaround in interest rates – is something we have not yet encountered in this form. the same can be said about the specific vulnerabilities surrounding energy and gas reliance. that is why our empirical values and models are not much help when assessing the risks. what we have to do, then, is painstakingly monitor each loan individually. supervisors are aware of these challenges, and they will raise these topics with you, ladies and gentlemen. we also expect you to calculate not just baseline scenarios based on the market consensus but also adverse ones. in times when uncertainty is as high as it is right now, there are three things that can help. first, proceed cautiously and with foresight. second, expect the journey to be difficult. third, preserve capital buffers. 4 conclusion ladies and gentlemen, the turnaround in interest rates is upon us, and that's good news for banks in the medium to long run. what matters, though, is how institutions deal with, and weather, the short - term burdens. what matters as well is an appreciation that interest rates are just one part of the big picture. and the big picture is fairly bleak right now. the risks have most certainly risen : inflation, energy shortages, a looming recession. that said, as things stand today, i am not expecting us to see a credit crunch or even a general banking crisis next year. in summary, then : whilst it is true that banks are no longer " stranded " as far as interest rates are concerned, the high tide will be accompanied by stormy weather and rougher seas. banks, then, need to be vigilant and gain a firm footing so as not to be caught by the currents and washed out to sea. thank you very much for your attention. 4 / 4 bis - central bankers'speeches