lowinterest - rate environment. as things stand, this is particularly the case in the corporate bond and syndicated loan segment. 2. as for banks ’ ability to bear risks, the picture is less clear. german banks today are better capitalised than they were just a few years ago, but their profitability remains weak. 3. this is why the financial stability review takes a particularly close look at the situation in the housing market – after all, this sector has often been the primary source of critical developments in the past. mortgage lending in germany is not a highly procyclical phenomenon. this is to be welcomed, since it dampens the risk of overvaluation from this side. yet banks are structurally vulnerable to changes in bis central bankers ’ speeches prices, so we will continue to keep a very close eye on developments in the real estate markets. 4. the banking union helps to better identify risks and to force the private sector to absorb a share of losses. a key component – from a financial stability angle – is the single resolution mechanism. in future, private sector owners and creditors are to be forced to shoulder the cost of restructuring or resolving banks. 5. but the banking union alone will be unable to loosen the sovereign - bank nexus because sovereign exposures continue to enjoy privileged regulatory treatment. this preferential treatment therefore needs to be brought to an end over a medium to long - term horizon. the financial crisis swept away any lingering doubts that the close financial ties between banks and sovereigns can pose a threat to financial stability. this is another area, then, in which we should not create any misguided incentives to take on excessive risk. i would like now to outline these findings in greater detail. 3. german equity and bond markets risk premiums on corporate bonds are currently very narrow. at times in 2014, risk premiums for non - investment grade paper in the euro area were no more than just under 300 basis points. so they came very close to the lowest levels seen in the pre - crisis era. we used these spreads to calculate implied default rates, which are lower than the historical norm. this suggests that risk is being underestimated – all the more so when one considers the frail state of the economy. broadly speaking, we see signs that enterprises are increasingly sourcing debt capital from outside the banking sector. this might be a sensible response to ongoing structural adjustments in the banking sector. but raising debt capital can pose a fresh set of risks because more capital makes

claudia buch : presentation of the 2014 financial stability review speech by prof claudia buch, deputy president of the deutsche bundesbank, at the unveiling of the deutsche bundesbank ’ s financial stability review, frankfurt am main, 25 november 2014. * 1. * * introduction today is the ninth time the deutsche bundesbank is presenting its financial stability review. for some of you here today, this is no doubt a routine event. but for me it ’ s something of a first. so i am particularly delighted to welcome you all here today. even though the bundesbank has published its financial stability review on nine occasions now, the task of safeguarding financial stability is actually a new statutory mandate that has been given the bundesbank. it was only last year that the german federal government established the financial stability committee. the decisions made by this committee are based on analyses prepared by the bundesbank. the bank is likewise a member of major committees at the european level which deal with financial stability matters. the bundesbank defines financial stability as the financial system ’ s ability to perform its key macroeconomic functions, and particularly so in periods of stress and upheaval. this is naturally a very broad definition that needs to be fleshed out in greater detail. we do this by focusing on two crucial questions : are investment decisions being distorted by moral hazard? this moral hazard can arise from implicit or explicit government guarantees, for instance. but equally, it can also emanate from low interest rates and an ample supply of liquidity by central banks. this spurs investors to search for higher yields – even if it means taking on the elevated risks associated with these superior yields. this brings me straight to the second question : how well equipped is the financial system to fend off risks that materialise? capital plays an absolutely vital role in this regard. after all, the more capital a bank has, the more stable is not just the individual bank, but also the entire financial system, and the better it is shielded against the risk of revaluations – meaning greater stability all round. it is for this reason that the financial stability review seeks to identify signs of potential systemic instability early on. we examine whether the financial system is sufficiently resilient to withstand a number of downside scenarios. 2. main findings of the financial stability review so what are the main findings of the financial stability review? 1. there are incentives for investors to engage in riskier behaviour in the current