has addressed this point as part of a macro stress test conducted on small and medium - sized institutions, which simulated various paths of interest rate movement. an abrupt interest rate increase and a flattening of the yield curve are the scenarios which would weigh most heavily on banks ’ net interest income. this is attributable to term transformation. the strains caused by a rise in interest rate would particularly lead to a stability problem if other macroeconomic risks were to materialise simultaneously. banks need to equip themselves to deal with this by ensuring they have adequate capital buffers. developments in this regard are positive. for instance, german banks have improved their resilience by raising new equity and retaining earnings. the visible overall drop in the tier 1 capital ratio is attributable to the stricter regulatory requirements of crd iv and the crr. since we began carrying out our basel iii impact study in 2011, the average common equity tier 1 capital ratio of the largest german banks has risen to 9. 3 %, almost doubling. please allow me to outline an additional aspect of the banking system ’ s current situation. global regulation and european supervision are contributing to the level playing field that has been called for and which is necessary. but this also means that german banks are increasingly facing up to international comparison. in its most recent global financial stability report, the imf warns that, in terms of return on equity and return on total assets, german banks languish well below average in both an international and a european comparison. german banks lag far behind their foreign competitors in terms of the diversification of their earnings, in particular. effectively, this means that the german banking sector needs to press ahead with the expansion of noninterest income as a percentage of total earnings in order to be able to hold its own when competing for clients and investors in the long run. bis central bankers ’ speeches in the past months, banks have cleansed their balance sheets of many legacy issues and strengthened their capital base. the measures taken thus far to strengthen resilience are very much to be welcomed. however, german banks are by no means “ out of the woods ” yet. so where should the focus of such efforts be placed? on the one hand, with regard to improving resilience, risk provisioning always needs to be brought into line with the prevailing economic environment. on the other, methods of further increasing capital levels, for example by retaining profits, need to be explored. german banks

based on full implementation of the basel iii rules, which will apply from 2018 onwards. what this shows not least is : german banks cannot afford to stand still. last but not least, germany also has a some catching - up to do with regard to the leverage ratio. although this non - risk - weighted capital ratio has improved in recent months – 20 of the german banks that participated in the comprehensive assessment are already compliant with the 3 % leverage ratio figure, which will be in effect from 2018 onwards – german banks are still performing relatively poorly by international standards. bis central bankers ’ speeches 3. low - interest - rate environment and weak earnings : the situation of germany ’ s banks let us now analyse the current situation of the german banking sector. in addition to a high level of resilience – as confirmed by the comprehensive assessment – banks also need, not least, to be successful in terms of sustainable profitability in order to be able to hold their own in the market in the long run. so what can we ascertain from banks ’ earnings situation? let us take a look at something of vital importance to german banks : interest income. this continues to be characterised by the ongoing phase of low interest rates. german banks ’ business models rely strongly on interest income, relatively speaking. when interest rates are low, this naturally puts pressure on earnings. for instance, in the first half of this year, the operating income of 11 german banks with an international focus was roughly 8 % down year - on - year. this decline was largely driven by falling net interest income and a drop in net trading income. viewed in relation to the german banking system as a whole, the impact of low interest rates currently remains limited. savings banks and credit cooperatives, in particular, managed to bolster net interest income by increasing lending business volumes. however, if interest rates remain at current levels for the foreseeable future, the pressure on earnings will intensify further : maturing higher - yielding loans would then have to be rolled over into lower - yielding loans. as it is almost impossible to lower deposit rates any further in many cases, it could be worth considering expanding lending business to counter the fall in net interest income. a protracted period of low interest rates, moreover, could spark a greater risk appetite among low - earning institutions, in particular. furthermore, a cross - sectional analysis of german institutions reveals a high degree of synchronisation with regard to interest rate risk. the bundesbank