. challenges for the german banking system the ongoing crisis has been challenging for the banking system in germany and europe as a whole. nevertheless – as stated in my third proposition – the risk outlook for the german banking system has been improving. generally, it has to be borne in mind that the german banking system is dominated by domestic business activity. the share of foreign business, measured by the volume of credit granted to non - banks, is just under 21 %. in some major segments, however, the german banking system demonstrates a high degree of internationalisation. this is why the challenges for the international financial system are also relevant to us. janet l. yellen : fiscal responsibility and global rebalancing, speech at the committee for economic development 2010 international counterparts conference in new york at december 1, 2010. bis central bankers ’ speeches one of the major national and international topics at the moment is refinancing. with regard to the composition of the refinancing basis the tendency is for the deposits of non - banks to increase. in the german banking system, the deposits of non - banks as a share of total liabilities have risen from 37 % prior to the onset of the crisis to 42 % today. in principle, this can be seen in a positive light as the deposits of non - banks are comparatively stable. however, market - based refinancing – which is still important − continues to show a very short - term bias. this effect has also to be seen in the light of the “ two - tier ” banking system, in which a few banks in europe still have only limited access to longer - term funding. given the large refinancing needs, banks run the risk of coming into conflict with the high level of government borrowing needs. this poses a severe risk to earnings for some banking systems, although this is probably not so much the case for germany as the banks that are active in the market do not generally conduct maturity transformation on a large scale. a number of german credit institutions still have substantial holdings of problem assets in their books. the most vulnerable exposure segments include the financing of commercial real estate and the legacy holdings of structured products. to assess the situation in the german banking system, last year the bundesbank surveyed 11 large german banks on their financing of commercial real estate. the total amount of credit they granted stood at around €325 billion, some 15 % of which was accounted for by properties in the usa and just under 9 % by real estate

time is that the horizon for action depends on the nature of the shock. this viewpoint is correct, as far as it goes. central banks do typically refrain from reacting to supply shocks that have opposing effects on output and inflation, so as not to overreact and reinforce the effect on growth, in either direction. and that might even be the case when faced with a succession of supply shocks, such as the steep falls in oil prices we have experienced recently. each shock should in principle have a short duration and should not have a persistent effect on inflation. however, since there is always a backward - looking component in inflation developments, the longer inflation stays too low, the greater the risk that inflation does not return automatically to target. specifically, if agents start to look at the track record of recent inflation, rather than the inflation objective, it affects their benchmarks for wage and price setting decisions. what happens then is that low inflation feeds into inflation expectations and creates second - round effects. in that situation, even what began as a positive supply shock can turn into a negative demand shock. as inflation expectations fall, it pushes up real interest rates, producing an unwarranted monetary tightening. and the unexpected low inflation raises real debt burdens, which has a negative effect on aggregate demand due to the different propensities to consume and invest of borrowers and lenders. output and inflation, then move again in the same direction – but this time downwards. for that reason, in a context of prolonged low inflation, monetary policy cannot be relaxed about a succession of supply shocks. adopting a wait - and - see attitude and extending the policy horizon brings with it risks : namely a lasting de - anchoring of expectations leading to persistently weaker inflation. and if that were to happen, we would need a much more accommodative monetary policy to reverse it. seen from that perspective, the risks of acting too late outweigh the risks of acting too early. in sum, even when faced with protracted global shocks, it is still monetary policy that determines medium - term price stability. if we do not “ surrender ” to low inflation – and we certainly do not – in the steady state it will return to levels consistent with our objective. if on the other hand we capitulate to “ inexorable disinflationary forces ”, or invoke long periods of transition for inflation to come down, we will in fact only perpetuate disinflation