so a possible interest rate hike would represent a return to conventional monetary policy terrain. and it is not so much the timing of the interest rate move that matters as the subsequent interest rate path which the fed follows. what would a return to normal policy rate conditions in the united states mean for the euro area and for germany ’ s banks? since 2013 we have observed that policy divergence between the united states and the euro area has had two knock - on effects. first, the differential between us and euro - area interest rates has widened ; second, the euro exchange rate has dwindled. this trend gained traction early this year when the eurosystem announced the large - scale purchase of government bonds. that increased the spread between us treasuries and german bunds and sent the euro plummeting against the dollar. so german banks need to remember that even if the fed raises its policy rates, the spell of low interest rates in the euro area looks set to continue. remember what i said just a few minutes ago – sitting tight and hoping for the best simply isn ’ t an option. and as far as possible exchange rate volatility is concerned, banks might theoretically be exposed to currency risk. two factors play a role here. the first is banks ’ funding gap in dollars. that gap measures the excess of a bank ’ s us dollar assets over its us dollar liabilities. the bigger this overhang, the more exposed the bank is to exchange rate risk. the second factor is the bis central bankers ’ speeches mismatch between the maturities of assets and liabilities denominated in us dollars. this maturity mismatch measures both exchange rate risk and interest rate risk. at the onset of the global financial crisis in 2008, both the funding gap and the maturity mismatch of german banks were very large indeed. when the forex markets dried up and german banks got cut off from us dollar funding, the central banks had to step in and lend a helping hand. since then, the ecb, to name but one, has been providing swap facilities, but the take - up now is virtually non - existent. german banks have reduced their vulnerability since those days, slashing their funding gap by downsizing their stock of us dollar assets. what remains substantial, though, is the scale of the maturity mismatch of their us dollar investments. however, the actual risk exposure here is relatively small, because german banks these days are much better hedged against currency risk

this is because more than half of all loans to households are loans for house purchase. [ 1 ] at 80 %, real estate makes up the lion ’ s share of fixed assets in germany. our assessment of the real estate market situation is similar to that of last year : cyclical risks, to which the real estate market is making a significant contribution, are continuing to mount. however, we see no need to activate borrower - based instruments intended to stabilise lending standards – in other words, a loan - to - value ratio and an amortisation requirement. how have we reached this assessment? house prices are an important indicator and have continued to grow sharply, rising by around 8 % over the past year. property prices in german cities are likely to stand around 15 % to 30 % above the value that would correspond to the fundamentals. at present, however, we do not see any clear indications of mounting speculation being driven by credit. whether there is a self - reinforcing “ narrative ” – to use the words of nobel prize winner robert shiller – cannot be clearly assessed. [ 3 ] there are indications of this, however. • first of all, the competition in granting residential real estate loans is highly intense. with growth of 5 %, loans for residential property recently grew at a slightly above - average rate. segments of the market have shifted to the savings banks and credit cooperatives. • prudential surveys amongst institutions show that there are certain signs of lending standards being relaxed – but only slightly and not across all institutions. • households and banks expect residential property prices to rise further. it is difficult to say whether they are being overly optimistic here. at the very least, households are expecting less pronounced price rises in rural areas than in big cities and they expect smaller increases in prices per year over a period of five years than over one year. all in all, it would therefore be premature to issue the all - clear for the real estate market. there is a need for action in two areas. in a warning to germany, the european systemic risk board ( esrb ) has just recently highlighted the need to close existing gaps in the data. we still know too little about one particular central indicator for estimating risk : the quality of lending standards. surveys of institutions, like those we have conducted once again over the past year, provide us with vital information. ultimately, however, they are costly for all involved and do not offer a robust statistical footing for forward -