sabine lautenschlager : deutsche bundesbank ’ s 2013 financial stability review speech by ms sabine lautenschlager, deputy president of the deutsche bundesbank, at the presentation of the deutsche bundesbank ’ s 2013 financial stability review, frankfurt am main, 14 november 2013. * 1. * * introduction ladies and gentlemen i am delighted to welcome you to the bundesbank today. the presentation of the bundesbank ’ s financial stability review has become a firm fixture in the calendar. and, looking around, i can see some familiar faces. and, today, i will also be raising issues with which you are familiar. for example, although the tensions in the financial system have eased since mid - 2012, the side effects of the crisis policy are now coming into focus. long - term low interest rates and abundant liquidity have a knock - on impact and weigh, for instance, on banks ’ profitability. crisis policy has given us breathing space that now has to be used for adjusting bank balance sheets and for consolidating public finances. this is because the debt crisis is by no means over. and, for that reason, i will begin with this topic. the second main point of my remarks will be the situation of german banks and, third, i shall, of course, be going on to talk about the banking union, which is connected with the two preceding issues and currently the dominant topic in the world of the european supervisors. after that, i shall be handing over to dr andreas dombret. one of the things he will be talking about is how insurers are getting on in the current low - interest - rate setting and what implications the low interest - rate has for the property markets. 2. european sovereign debt crisis let us first take a look at the european sovereign debt crisis. as i already mentioned earlier : since the middle of last year we have been seeing a certain easing in the markets for european government bonds. the crisis measures taken by european governments and the european central bank ( ecb ) have certainly played their part. apart from that, though, some member states have been making progress with their reforms. as a result, in crisis countries we note a considerable decline in current account deficits, falling structural budget deficits and, for the most part, shrinking unit wage costs. the calm that has set in is deceptive, however. despite the consolidation measures, levels of public debt have been continuing to climb. we have

##ibly, the situation in some european countries such as the united kingdom, spain, but also the netherlands, remains difficult. it would especially cause problems for some banks if failures were to occur simultaneously in more than one of these cyclically dependent sectors. it is encouraging, however, that banks have continued to strengthen their ability to absorb losses. we note a steady improvement in german institutions ’ capital ratios over the past few years. as at june 2013, the 12 largest german banks showed an average tier 1 capital ratio of 15. 3 %. that represents a year - on - year increase of more than 2 percentage points. the leverage ratio, too, has fallen on average from 33 to 28. that is a gratifying development on the whole. it shows that future regulatory requirements are being anticipated. for us, this creates a good starting point for the forthcoming balance sheet assessment, which i shall go into later. however, this should not detract from the fact that some banks still have to undertake considerable efforts to meet the requirements of basel iii. quite a few banks will therefore continue to shrink their balance sheets. this is because the increase in the capital ratios of the major german institutions over the past few years has been achieved less through the retention of profits than by reducing holdings of risky assets. thus, the capital increase between june 2012 and june 2013 was more than €3 billion in net terms ; since december 2008 it has been almost €20 billion. by contrast, the large german banks have reduced their risk - weighted assets by more than € 150 billion since june 2012 ; over the past four and a half years, the figure is as high as nearly €600 billion. this means that these 12 banks have reduced their risk assets by more than one - third in this four - andhalf year period. i nevertheless basically take a positive view of this deleveraging, since it principally affected the cutback portfolios that were not part of the banks ’ core business. at the current end, the profitability of the large banks has stabilised. recently, this has been underpinned mainly by the trading result and low risk provisioning – two income components which tend to be rather volatile and cyclically dependent. the most important source of earnings, especially for the german universal banking system – net interest income – is bis central bankers ’ speeches declining, however. that is also due to the current low - interest - rate setting, which is exerting extra pressure on the interest margin.