long - term government securities issued by the governments of the developed countries, thus contributing towards reduction of the long - term interest rates. the low interest rates had multiple effects, including the acceleration of the credit growth in a number of industrial countries, swift growth in the prices of properties and share ; and generally, taking high risks during the contest for generating higher earnings. the financial crisis, however, demonstrated that there are serious problems in the area of microeconomics, as well. it turned out that the investors are insufficiently informed on the nature and the risks of the complex financial instruments ; wrong incentive of the financial assets managers arising from the reward system based on generated earnings ; the problem of objectivity of the rating agencies which provide credit rating for the financial instruments on issuer's request. furthermore, it turned out that also there have been nonignorable problems at a micro level in the area of risk measurement and monitoring, arising from the application of statistical models which do not take account of the infrequent events, and after a longer period of high instability, a priory produce perceptions for globally lower risk level. within the microeconomic reason behind the financial crisis, we came to the highly frequent issue of " shadow banking system ", as an expression of the liberalistic approach for as higher deregulation as possible. all these macroeconomic and microeconomic reasons, in environment of higher financial system complexity, created systemic risks which occurred in the last quarter of 2008. distinguished! it is an axiomatic truth that the financial system functioning relies upon trust. practically, it is a must, illustrated by this crisis, as well. it turned out that it is easier to undermine the trust rather than to restore it. on september 15, 2008, lehman brothers bankrupted. the avalanche of losing the trust accelerated in the complex and closely connected modern financial system. the consequences, quite naturally, were first evident in the us financial market which plays an exceptionally important role in the funding of the banks and the private sector. it also became clear that the banks'off - balance sheet activities, in environment of illiquidity of entire segments in the global financial market, will cause enormous losses which will have to be funded with the banks'capital. this, understandably, further increased the mistrust with respect to banks'capital adequacy rate. in a short period, the markets went dry. the ghosts typical for the crisis of the thirtieth ( 1929 - 1933 )

. this nexus opens the debate on the so - called " financial dominance ", the possible tradeoff between rising costs to curb inflation and effects for financial stability. against this background, one of the key questions is how well are financial systems prepared to rise to the challenge of rising interest rates. the answer to great extent boils down to the health of the balance sheet of households, companies and banks, i. e., their capacity to absorb shocks. what is very important is that banking systems in the region weathered the pandemics shock well and in many countries, including in nm, emerged with even stronger capacity, which can be observed by higher capital and liquidity buffers and better quality of credit portfolio. although according to the recent eib surveys banks expected deterioration of credit quality, npl ratios have remained low ( below 4 % ). still, given the elevated debt levels of the private sector that hovers around 80 % of gdp, increase in real estate prices, which in cesee reached 15. 5 % - the highest growth since the gfc, as well as 2 / 4 bis - central bankers'speeches expected further tightening of the credit conditions, it is not time for complacency. one of the key lessons learnt from the covid 19 crisis is the resilience and it must remain the name of the game for the banking sector going forward. in the current context when the interplay between monetary policy and financial stability is more complex, and trade - offs are larger, macro – prudential management plays an important role. a recent bis paper finds that prudential policy tightening, ahead or during the monetary policy tightening, reduces the likelihood of financial stress and provides more headroom for monetary policy. following the pandemics, countercyclical or systemic risk capital buffers were actively deployed across the region. financial regulators in seven countries, including in our case, intervened with the countercyclical capital buffer4, in six countries ( bulgaria, croatia, romania, slovenia, serbia and montenegro ) have continued to apply or introduced the systemic risk buffer and in five countries implemented borrower - based measures5, which more directly affect the quality of credit demand and contain risks. keeping banking sector sound and in good capacity to lend is important in the light of the urgently needed structural reforms in the region. as we are lagging behind advanced europe in terms of income and productivity, sustaining banks'financing can contribute in narrowing those gaps. at the same time,