not a crisis of the euro as our common currency. since the start of the euro, inflation has been in line with the eurosystem ’ s definition of price stability, and the euro continues to be a strong currency – to some, it actually appears to be too strong. but it is generally accepted that the two central elements of the crisis are large macroeconomic imbalances stemming from diverging competitiveness levels, and unsustainable levels of public debt. the root causes of the crisis : macroeconomic imbalances and over - indebtedness no lasting solution to the crisis will be achieved unless these root causes are tackled. firewalls can help some countries to cope better with the effects of sudden shifts in investor sentiment, but, ultimately, all it can do is buy time. as the imf points out in its recent world bis central bankers ’ speeches economic outlook, firewalls by themselves cannot solve the difficult fiscal, competitiveness and growth issues that some countries are now facing. 2. 1 macroeconomic imbalances there is broad consensus that macroeconomic imbalances, which have built up in recent years, lie at the heart of the crisis. but the best way to correct these imbalances has been the subject of intense debate. exchange rate movements are usually an important channel through which unsustainable current account positions are corrected – deficit countries eventually see a devaluation, while surplus tend to revalue their currencies. the reactions that this triggers in imports, exports and corresponding capital flows then help to bring the current account back closer to balance. in a monetary union, however, this is obviously no longer an option. spain no longer has a peseta to devalue ; germany no longer has a deutsche mark to revalue. other things must therefore give instead : prices, wages, employment and output. the question now is which countries have to shoulder the adjustment burden. naturally, this is where opinions start to differ. the german position could be described as follows : the deficit countries must adjust. they must address their structural problems, reduce domestic demand, become more competitive and increase their exports. but this position has not gone uncontested. indeed, well - known commentators suggest that surplus countries should bear part of the adjustment burden in order to avoid deflation in deficit countries. they also point out that not all countries can act like germany, in other words, not all countries can run a current account surplus. hence,

loss given default. moreover, for interest - bearing securities, risk premiums were assumed to rise by between 30 and 1, 500 basis points, depending on credit quality. a 20 % loss in value was assumed for other securities, such as equities. ladies and gentlemen, when doctors start explaining all their findings down to the very last detail, some patients might think, “ don ’ t beat around the bush, just tell me what i have ”. so here are the key diagnoses, to start with. small and medium - sized german credit institutions expect their profits to continue shrinking between 2016 and 2021, according to their planning. in concrete terms, they expect their pre - tax profit to dwindle by 9 % and their total return on capital to fall by 16 %. in the same period, the aggregate common equity tier 1 ( cet1 ) ratio is expected to rise from 15. 9 % to 16. 5 %. further cuts in interest rates would reduce overall pre - tax profitability by up to 60 %. all told, however, these effects are less drastic than in the 2015 survey. under the conditions prevailing in our stress test, around 4. 5 % of the institutions would fail to meet the prudential requirements set out in pillars i and ii plus the capital conservation buffer, taking into account hidden reserves. one thing that increases in the low - interest - rate environment is competition : over 70 % of institutions expect competition from other banks and savings banks to pick up – and as many as 85 % see fintechs as a source of mounting rivalry. on this score, nearly every second institution can see a prospect of mergers and takeovers in the medium term. one set of findings i am sure you will all be interested in is from the residential real estate market. this much i can tell you already : we are seeing the unsecured portion of housing loans increasing at one in three institutions, but there is no sign of a worrying easing of credit standards. and the good news is that a simulated extreme drop in housing prices in germany would shave just one percentage point, or thereabouts, off institutions ’ cet1 ratio. 2. ongoing decline in profitability forcing banks to fight back let us now take a closer look at the details, starting with earnings. in this part of the survey, we 2 / 6 bis central bankers'speeches asked credit institutions for their budgeted figures for the period until 2021. you can see straight away that