to see what i have called “ tit - for - tat ” inflation [ 9 ] – with both parties trying to offset any real income losses [ 10 ] – we could see a negative spiral taking hold. monetary policy transmission the ecb cannot allow this to happen. and since profits are ultimately influenced by the business cycle, it is our responsibility to restrict demand enough to prevent such a spiral. that should, in turn, lead to slower margin growth and lower wage demands while reducing pressure in the labour market. but to gauge whether rates are sufficiently restrictive, we need to know how much traction our policy tightening is having – and is likely to have – on spending in the economy. that is why policy transmission is the third element we are looking at. so far, our rate hikes are being transmitted forcefully to bank borrowing [ 11 ] and lending rates – faster even than during previous hiking cycles. for the euro area, bank lending rates to firms currently stand at 4. 2 %, up by 267 basis points since may last year. this is their highest level since january 2009. bank lending volumes are also weakening, leading to a sharp contraction in money growth. from november onwards, monthly lending flows to firms have been negative on average. money ( m3 ) has also seen negative flows, causing its year - on - year growth rate to plunge from almost 12 % in mid - 2020 to 1. 9 % in april this year. and banks report that credit standards are tightening, which heralds lower lending flows to come. in the ecb ’ s latest bank lending survey, the pace of net tightening in credit standards was at its highest level since the sovereign debt crisis in 2011. this is the desired effect of our policy : we want financing conditions to tighten. and, so far, it has not been at the expense of bank performance, with the positive impact of higher rates on banks'interest margins outweighing the negative impact on volumes. but we know that our rate hikes have not yet been fully reflected in financing conditions. and we are also aware that recent financial market tensions may have intensified the tightening by increasing bank funding costs and encouraging more risk aversion. so we need to monitor carefully how this pass - through process is playing out. and if the recent tensions do leave a lasting footprint on markets, a given level of rates would mean tighter financing conditions – and that would have to be reflected in the level at which rates peak. at the same time, there is also uncertainty

clearly highlighted by the financial crisis. given the experience of the past year, i believe that indirect supervision, as is being carried out by the ecb, can be of great benefit – to banks, to their customers, to the stability of national financial centres and to the real economy. but i will come back to that later too. now, going back to finding a name for the “ less significant ” institutions. how should we refer to these 3, 200 banks? as you ’ ve probably noticed by now, i ’ ve opted for the term “ small and medium - sized institutions ” – and this decision was preceded by a lengthy discussion. for those of you who represent a small or medium - sized bank, i hope that you are happy with this description ; it will see us through the rest of the evening. having now resolved the naming problem, we can turn our attention to some slightly more straightforward issues. i will address two topics this evening. • first, the challenges now facing small and medium - sized banks ; and • second, the cooperation between the ecb and the national authorities in supervising small and medium - sized banks. the challenges – weak profitability and low interest rates whether national or european, supervisors are always interested in banks ’ stability. and the most important components of a stable bank are capital, liquidity and profitability. capital serves as a buffer for losses – the higher it is, the more losses a bank can absorb before it collapses. if we want to assess a bank ’ s stability, we should first look at its capital. the capital ratios of small and medium - sized institutions in the euro area are gratifying. the average tier 1 capital ratio is 15. 2 %. bis central bankers ’ speeches in germany, the tier 1 capital ratio of this group of institutions is slightly below average at 14 %, but is still significantly above the regulatory requirements, which, as a supervisor, i find reassuring! and if we now look at how tier 1 capital ratios have developed recently, we can see another welcome development. they are stable. in the first instance, that is somewhat surprising, given that the balance sheet total of small and medium - sized banks has increased slightly, while capital has marginally declined. in fact, tier 1 capital ratios could reasonably have been expected to fall too. the fact that they remained stable can be explained by the reduction in the riskiness of banks ’ balance sheets – because this is the basis for calculating tier 1 capital ratios. that