perhaps decline even further. this finding leads to a couple of questions. why is r * declining? and what are the implications? as to the " why ", several global structural factors are driving the decline. one factor is lower structural economic growth. in many advanced economies, we have to get used to structurally lower growth going forward, due to modest productivity growth. another factor relates to the global savings glut. when desired saving exceeds desired investment, the interest rate falls to balance the two. if we take a closer look at who is saving, we see that a large share of global savings is concentrated among the richest households in the u. s., china, and japan. in countries like china, households have increased their demand for financial assets. understandably, the incentive to self - insure has increased, as the chinese have become wealthier and expect to live longer. this incentive is further strengthened by inadequate access to social safety nets. but demographic changes are also boosting savings in european households, as rising life expectancy leads to higher savings for retirement. this means that ageing populations not only challenge pay - as - you - go pension systems – with fewer workers paying for the retirement of larger side 3 af 7 generations. they also present challenges for funded systems by lowering structural interest rates and thus, returns on savings. this leads to my second question – what are the implications of a lower r *? a number of effects are worth considering. the effectiveness of monetary policy to respond to an economic contraction may be hampered. real rates will have to be lower than r * to stimulate the economy. another key implication is that the structural factors holding down r * are neither expected to be short - lived nor to reverse anytime soon. therefore, lower rates are probably here to stay for even longer than justified by the business cycle. low interest rates and low growth present challenges for pensions continued easing of monetary policy and lower structural interest rates will intensify the challenges currently facing institutional investors and the pension system in particular. these challenges are further compounded by the gloomy outlook for growth, as well as demographic developments. for defined contribution schemes, current contribution levels are likely to produce disappointing and inadequate results, all else equal. similarly, the costs of defined benefit guarantees will increase. the lower the rate of interest, the higher the present value of liabilities. this weakens long - term solvency and exacerbates challenges of underfunding. the funding gap is widening and a recent

- term severe stress in funding markets, has been subject to extensive discussions over several years. the lcr will become binding for financial institutions across the eu from january 1, 2015. at the heart of the lcr is a requirement that banks should hold a buffer of high quality liquid assets ( hqla ) to survive a 30 - day period of market stress. the technical details are very complicated, but the basic idea is fairly simple and reasonable. what can become a problem, however, is the definition of what constitutes high quality liquid assets. if that definition is too centralised, too rigid and based on an implicit assumption that bis central bankers ’ speeches all assets under the same formal classification perform equally well in all markets – then we will have new financial problems. what we need is portfolios of liquid assets which are well diversified, and consist of assets with proven market liquidity and credit quality. we need liquidity standards which will facilitate a self - sustaining banking sector and not adding further to its reliance on central bank facilities, or adding further to the interdependence between banks and the sovereign. we need assets with a broad and diversified investor base. in that respect it is surprising to see how strong the push has been towards a definition of liquidity which is heavily reliant on government bonds and central bank facilities, for example the basel committee proposal that at least 60 per cent of bank liquidity should include only such assets. if government bonds were defined as the only high quality liquid assets, the link between banks and sovereigns would be reinforced, especially in the absence of risk weights for such bonds and if there are no diversification requirements. as central bankers, we are obviously in favour of prudent fiscal policies and a low level of public debt. but the combination of the current low danish public debt and liquidity regulation insisting on government bonds constituting a dominant large share of banks ’ liquidity buffers would hurt liquidity in the danish government bond market. the answer should obviously not be to increase public debt. the solution is not difficult. denmark has one of the largest and most liquid covered bond markets with a stable institutional framework and a very strong track - record of market liquidity and credit quality, including throughout the entire financial crisis. this track - record has been confirmed in a recent comprehensive study by the european banking authority ( eba ). danish covered bonds are currently used as the main instrument of bank liquidity management and there is no reason why they should not continue to