get a feel for the devastating consequences on the real economy of financial crises originating in real estate excesses. 2. credit : is the sky the limit? today i would like to focus on one of the two critical elements mentioned above, the growth of credit volumes. figure 2b easily explains the question asked in the title : is the sky the limit? the answer is just as easy. clearly the credit - to - gdp ratio cannot grow indefinitely because otherwise the cost of servicing the debt would end up exhausting the whole of gdp. in other words : what we observe here cannot be the manifestation of a secular trend! as we since 2000, average growth rates of real supply prices for single - family houses and owner - occupied apartments come to 2. 5 % and 3. 7 %, respectively ( annual growth rates based on quarterly data provided by wuest & partner ). borio, c. ( 2012 ) ; see also schularick, m. and taylor, a. bis central bankers ’ speeches will see, making sense of this development is less trivial. to get a broader perspective on this question let us enlarge the picture shown in figure 2b. figure 3 provides the international dimension. as is clearly visible, there has been a substantial built - up of credit relative to gdp on a global scale over the last decades. there are some notable differences in the size, timing and scope of this development between individual countries but the general direction is the same. ominously the upward trend was particularly steep in the run - up to the recent financial crisis in those countries that were subsequently most heavily affected ( us, ireland, spain, uk ). figure 4 looks at the swiss data from an earlier starting point. here one is struck by the fact that the recent significant upward trend in the credit - to - gdp ratio has been preceded by an even more spectacular jump during the 1970s and 1980s, pushing the ratio to about 150 % – a high level in international comparison. during the 1990s, it then fluctuated around this mark. from 2000, we again observe an increase in the ratio3, at accelerated speed since 2009, such that, as of today, the ratio has reached about 170 %. 4 this more recent upward trend seems to be continuing unabated. how can we understand these developments? and can this understanding form a basis for predicting the likely future evolution of this variable in switzerland? these are the questions i would like to focus on in this speech. to begin with

supply for credit. yet additional insights are possible when considering it separately. for instance, a structural low interest rate level such as typically observed in switzerland can help explain a relatively high credit - to - gdp ratio in international comparison. similarly a prolonged period of exceptionally low rates such as the one we are currently experiencing is a potential explanation for an increase in credit volumes. at a superficial level this relation is obvious. low interest rates reduce the cost of servicing a given credit which becomes affordable for a broader range of households. alternatively, borrowers can afford higher credit lines. moreover, low interest rates translate into higher asset prices and higher notional wealth. the increased collateral values support higher credit lines and decrease the amount of credit rationing. this is, in particular, relevant with stiglitz, j. and weiss, a. bis central bankers ’ speeches reference to the real estate market where higher house prices imply higher mortgage volumes to finance the same stock of housing. the rationality of this explanation has to be relativized, however. this is certainly the case if we think of credit financing long run projects such as real estate. here the average interest rate over the life - time of the credit must be relevant for investment decisions. an exceptional, prolonged period of low rates might imply a decrease in the lifetime average rate, a form of “ window of opportunity ”. however, the very fact that interest rates must – eventually – rise again implies that credit expansion based on low interest rates cannot be viewed as a shift to a permanent higher credit level. at higher interest rates, credit demand will decline once again. to the extent that the credit expansion was driven by miscalculations on credit affordability, this may even lead to a crisis. 3. 4. behavioral biases the latter remark leads to a fourth potential explanation, that is, credit expansion driven by behavioral biases. as highlighted by hyman minsky7, the credit cycle appears to be driven by “ waves of optimistic and pessimistic sentiment ” 8. in an upswing, expectations about future developments may turn erratically exuberant. observing a long period of price increases, investors tend to believe that new circumstances justify the perpetuation of the upward trend and act on this belief. overconfident lenders and borrowers are increasingly ready to take higher risks. ever increasing prices become a necessary condition to enable borrowers to service their debts. then the tide turns. a few investors fail to meet their obligations,