Question
I have two questions. The first one relates to Mr Dombret's last sentence "...as soon as we see a risk to financial stability, we will act". Could you provide more clarity on this point? And then a question for Ms Lautenschläger about the risks stemming from the banking sector. You talked at great length and in much detail about the "health check-up" that banks are currently carrying out. Is it not the case that this "health check-up" and all that it entails – including possible uncertainties in the coming 12 months, but also the capital needs that may be identified at the end – itself also poses a major risk to financial stability?

Dr Andreas Dombret
First of all, since the start of this year, we have had a legal mandate to act when we see systemic risks. And I also said that we have only a few instruments at our disposal, but that many instruments are still being developed. The Financial Stability Committee has only existed since the beginning of this year. Ms Lautenschläger and I represent the Bundesbank on the Committee, which means that we are helping to set up these instruments. It is, of course, clear that we have not issued a warning today. On the contrary, with regard to housing prices and insurers as well as to banks, we have highlighted problems that may arise in a protracted period of low interest rates, but we have explicitly stated that we do not yet see any risks to financial stability in this regard. However, it is also clear that if we were to see risks, we would be obliged to act. In this context, we are already raising public awareness of the situation today. Not only today are we doing this. I referred to the Bundesbank's October Monthly Report and even to last year's Financial Stability Review. We are in any case already taking preventive action. Ms Lautenschläger has made clear statements directed at banks. I also made some clear statements to insurers and I addressed central counterparties, who are accumulating more and more risk, which is something we also need to bear in mind. I do not want to anticipate action. But you can rest assured that our aim is not to identify a systemic crisis after the event, but to use the tools that we have at our disposal to counter financial stability problems.

Sabine Lautenschläger
I ultimately see the "health check-up" as providing a major opportunity. It enables supervisors, who will hand over to the ECB, to have as clear a picture as possible of the risk situation at individual institutions. That is the first opportunity. The other opportunity is to be able to rebuild trust in the market. This, of course, entails certain risks, as informing the general public within these 12 months in an appropriate manner about the methodology, what procedures are being carried out and the steps in the procedures – and thus removing this uncertainty – will pose a communications challenge. It provides us with a major opportunity. It is also a necessity, in order to detect legacy problems and be able to establish where responsibilities lie. Uncertainties must be eliminated by spreading the communication out over the 12 months, with an explicit focus on transparency, so that people know what the ECB does, what the national supervisory authorities are currently doing and how they are going about inspecting the institutions

Moderator
It is, of course, clear, however, that no interim results will be published, as that would be a completely inappropriate use of communication.

Sabine Lautenschläger
We have made it clear that a figure will come at the end. But the procedure, like the methodology, must be transparent.

Question
I have a question about the impact of low interest rates. The Bundesbank has already requested information from banks about how their net interest income is likely to develop if the period of low interest rates persists. Can you give us an outline of the results? I am also interested in the enquiry regarding residential real estate loans. Is this also a kind of request for information? Could you provide us with more details on the exact nature of this enquiry? I also have a question about the real estate bubble, which you say does not exist. If I am not mistaken, prices have gone up by a quarter over a period of three years and next year they will increase again by 9%, which amounts to almost just over one-third. If lending remains at the current level, by what percentage would prices have to rise for you to start talking about a bubble?

Sabine Lautenschläger
I am not yet able to outline the results. The data have been submitted and we are currently evaluating them. But I can also tell you that the focus cannot be on individual regions, certain categories of banks, certain banks in certain regions, small or large. You will simply have to be patient and wait and see. The deadline has only just expired and we are now in the analysis phase.

Dr Andreas Dombret
You asked how much further prices would have to increase. First, these sharp increases are only found in major cities, whereas developments for the market as a whole give a completely different picture and we are a long way away from such large-scale price increases. The German market as a whole experienced a long period of sideways movement in housing prices. A price increase of 9%, which is what we expect for this year, is significant, in particular, given that the cumulative price rise between 2005 and 2008 in major cities was only just under 5%, and between 2009 and 2012 prices already rose relatively sharply. But this price rise for 2013 is not higher than the figure for the previous year. We need to look at the German market as a whole and then also separate out the major cities again. However, the most important point to make is that housing price increases give cause for concern from a financial stability perspective if this situation is reflected in lending, in banks' balance sheets and also in the balance sheets of insurers in some cases, which also invest in real estate. However, this has so far not been the case in the two most important components considered. First, the lending volume is not rising, which is a typical indication of a credit bubble, and there has also been no change in the loan-to-value ratio. If lending standards are reduced, there is a much greater willingness to grant loans at lower lending values. This is also not happening; we already established that last year. From a financial stability perspective, the situation thus does not yet pose a risk. However, sharp residential property price increases can certainly result in you, as the investor, experiencing wealth losses if a correction occurs. This does not mean that financial stability is at risk, as households have sound levels of debt sustainability and we consider ourselves to be on the safe side with regard to lending standards and the volume of mortgage loans. Nevertheless, the property market is very, very important. Mortgage loans account for roughly two-thirds of household debt in Germany and for 40% of exposures in German banks. Mortgage loans at savings banks and People's banks and Raiffeisen banks make up a share of as much as 50%. We are therefore talking about a very, very large segment, which is being looked at very closely. This is not a sectoral risk.

Sabine Lautenschläger
There are in actual fact separate enquiries that we have not carried out at all credit institutions, but only a selected group of credit institutions, and this will continue to be the case. We not only ask about old and new business, but also, for example, about lending standards, the loan-to-value ratio, what type of convenant-lite loans they have and whether they have additional collateral. Even a loan-to-value ratio of 100%, for example, is not a problem in itself, provided the institutions ultimately acquire additional collateral. A close examination of the situation is thus required. We also ask, for example, how do you calculate the lending value? Have you made any changes to your guidelines? How up-to-date are your valuations? We ask all these questions when we survey the institutions, as well as many quantitative questions – so both qualitative and quantitative questions.

Question
Ms Lautenschläger, you referred to the term transparency in connection with the "health check-up". When I look at what is happening in Italy with write-ups of central bank stakes with a guarantee for deferred tax assets, can one really speak of transparency? Does this constitute a level playing field and isn't there a chance that the German credit institutions might lose out? My second question refers to the earnings situation; you mentioned the high provision of banking services and the large number of banks in Germany. If I take this one step further, this implies that we have extremely favourable fees for consumers. Conversely, if this were to be changed or criticised, the solution to higher earnings would be to increase fees for consumers. Am I interpreting this correctly and is that what you meant? And Mr Dombret, the issue of "threats to the real economy" is brought up time and time again by representatives from the banking industry and with regard to the low margins, withdrawal from the lending business. How seriously should this be taken?

Sabine Lautenschläger
There is transparency regarding possible changes to accounting rules in other countries and we can rely on it. The bottom line is that transparency implies not only the provision of figures – which, it must be noted, become available only at the very end of the stress test and the AQR – but that the procedures and methods used are known, and that these can be taken into account in an assessment. That is what transparency is. As I am not familiar with all 28 EU countries' accounting rules, I am not going to go into detail on any of them. It is important to be aware that – even under harmonised prudential legislation – there are various decision-making processes and legal frameworks, which still have a very national outlook, and of the implications that these national differences have. This is transparency and this is precisely what we should aim to achieve. In response to your second question: there are overcapacities in the German banking sector and this ultimately leads to very tough competition, which always entails the risk that the institutions do not receive the margin they ought to receive to stay healthy in return for the risk involved in the transactions they carry out. I do not mean that credit institutions should be making outrageous profits; instead, my priority is to have a banking sector that is able to enforce risk-appropriate prices. You mentioned consumers – I assume you are referring to account maintenance fees, etc. In my opinion, the pricing of risk margins for lending business is an element of significant importance. Because the risk margin that a credit institution takes ultimately ensures that the institution can in fact cover the risks with the earnings it generated in the event that a loan is not repaid. For me, that is what is important here.

Dr Karlheinz Bischofberger
The concern that too low margins affect the provision of credit to the economy is unfounded. We cannot confirm such a link. There are no signs of a credit crunch in Germany, at least not on the whole. There is also no shortage of loans to medium-sized enterprises. If there were low margins and these presented a problem to profitability, we would certainly have to consider all potential approaches to lowering costs. In any case, there are no signs of any credit supply problems for Germany.

Question
Ms Lautenschläger, you said that EU primary law would have to be amended to establish a resolution authority. And I did not fully understand if this is your personal opinion. Or is it the official opinion of the Bundesbank? And if it is your personal opinion, is there also an official Bundesbank stance and what would that be?

Sabine Lautenschläger
Well, it is rarely the case that I state my personal opinion at a press conference. And if I did, I would clearly indicate it as such. But that shouldn't really happen. … Having studied law, I did, of course, take a look at Article 114. And this is both my personal and professional opinion. Questions have been raised as to whether this article is sufficient to establish a resolution authority and for corresponding waves of lawsuits to be withstood.

Question
Mr Dombret, you have mentioned several times that the macroprudential instruments need to be worked on and prepared for practical use. How quickly would you be ready to act? I have a second question. You said in your speech that monetary policy needs to be refocused on its core tasks. Does that mean that it is not currently focused on these tasks?

Dr Andreas Dombret
To answer your second question: it is very important – and this is not the first time we have said this – to refocus monetary policy on its original mandate, which is price stability. The current monetary policy certainly is very expansionary. In terms of the inflation forecasts and the current inflation figures, we consider this justified. However, we must ensure that the non-standard measures we rightly took to stabilise the financial sector are reduced again in the medium to long term. This viewpoint is therefore not in conflict with current monetary policy. However, it is important that monetary policy is concentrated on its original and primary mandate of ensuring price stability. Financial stability is an important objective. But price stability is at the heart of monetary policy. I would like to hand your other question over to my colleague, Mr Bischofberger.  

Dr Karlheinz Bischofberger
From 2014, we will have a range of instruments at our disposal thanks to the CDR IV and CRR package. But not all of them will be available straightaway. We will have two important tools as early as January. First, if we were to identify excessive credit growth in the real estate sector, we could react to it by varying risk weights. Second, also as of 1 January, we could, in theory, establish a systemic risk buffer. But I would like to add one thing: we have had little previous experience of these instruments in Germany. This is due, in particular, to the fact that we have not yet suffered a severe real estate crisis, unlike other countries. We therefore need to develop indicators which also take into account European requirements. In fact, this is something that all European supervisors and central banks are currently working on. We are ready to act. But, ultimately, we do not know all the details that we would need to know in order to use our instruments as effectively as possible.

Question
On the subject of banks' dependence on net interest income and the reduction in net interest income – to what extent are German banks more strongly affected by this than banks in other European countries? And with regard to insurers and their valuation reserves, can you tell us more specifically how the rules in this area need to be changed? Should policyholders' participation in the valuation reserves be reduced in general, or should more of a differentiation be made? What are paper profits and what are not? From your point of view, what options do insurers have for responding to the low interest rate environment if they do not want to do away with guaranteed interest rates? And, just to clarify: the scenario that you have calculated for the banks and used to simulate another economic downturn – am I right in thinking that the calculated slump in earnings includes risk provisions?

Sabine Lautenschläger
It is very difficult to make a comparison in this area, because it ultimately depends on the specifics of each country. The competitive situation in the United Kingdom, France, Spain or Italy is different to the situation for German institutions. And I am talking about the German banking industry as a whole. You cannot compare it with the others. We have a large number of banks. We have a very extensive branch network. There is fierce competition for customers in the Mittelstand and for retail business because in the past, many institutions abroad made their losses and learned their lessons through their credit substitution business. Now, they are all returning to the market. And that is why competition in Germany is tough. To illustrate my point in figures, the average bank interest rate for loans to enterprises in Germany in the area of new business fell from 5.8% in September 2008 to 2.1% in September 2013. This shows us the level of competition that exists. And it exists on both the assets side of the balance sheet and the liabilities side. And it is definitely caused, among other things, by regulatory measures. Because if you prioritise retail deposits in the LCR – the new liquidity ratios – competition on the liabilities side picks up momentum once again. So it is not really possible to make a comparison to other countries.

Dr Andreas Dombret
You asked about insurers and banks. This figure does include risk provisions. It would be a sad situation if our model calculation had, in fact, produced even greater losses. You asked two questions about the insurers. First, what can be done in terms of the valuation reserves? This is a political debate in which I do not necessarily wish to become involved. However, from the point of view of financial stability, it seems that paying out half a share of the valuation reserves to policyholders in the current interest rate environment is eroding insurers' capital buffers. Is this a systemic risk? Not necessarily. But life insurance policies make up a significant part of old-age provisioning in Germany. What could be done? There are various options. For example, we could say that hidden losses must be subtracted from the valuation reserves before any payouts are made, that is to say, we could reduce the valuation reserves by removing certain elements.

At the moment, the hidden losses sometimes even exceed the valuation reserves. In this event, one possibility might be for the supervisory authorities, in this case BaFin, to suggest that insurers only pay the guaranteed rate of return, to suggest that valuation reserves stop being paid out altogether. But we are merely discussing potential ideas. We are not announcing any measures, we are simply talking about what could be done in theory. You asked what insurers could do, and what their options might be. Life insurers are now increasingly offering insurance policies without a guaranteed return. That is one way of responding. This situation could then be avoided. There will be situations in the future in which guaranteed returns will be offered, guaranteed returns that run long into the future, but there will also be alternative models. Certain measures will also be taken on the cost side, but that is not entirely relevant to life insurance. Life insurers do have options for responding to the situation, and we believe that they are already using these options.

Question
I have two questions for Mr Dombret regarding housing prices. You have identified that housing is overvalued by up to 20%. I believe that in Germany such a rate can only apply to one or, at most, a few cities. If this is an average rate, ie if the rate is higher in some cities, I would ask you to name them. The second question is more for comprehension purposes. I do not quite understand how, on the one hand, you note that prices are overvalued yet, on the other hand, say that the banks have no problems as a result. Surely this overvaluation has an impact on banks' balance sheets? If this is not the case, could you possibly explain why banks have already had to automatically set aside risk provisions for overvalued prices?

Dr Andreas Dombret
The overvaluation of prices by up to 20% in these seven cities is the peak and not the average. That is how this statement should be understood. I do not wish to list the cities in question because it also refers to certain areas in these cities. [Question from the floor as to whether Berlin is again particularly affected by overvalued prices, as it was last year.] When you speak of overvalued prices, then you invariably mean the extent to which the rise in rents keeps up with the rise in prices. Due to many, many demographic factors but also to economic structural reasons, the potential for increasing rents in Berlin is lower than in other cities. Your second question was how it is possible for banks not to be affected if rent prices – housing prices – rise. It is a fact that prices have been overvalued. Let us assume that in many – but by no means all – cases investors have also injected more capital into transactions so that instead of increasing proportionally, banks' risks have actually been cushioned. That is what has happened

Moderator
The corresponding article in October's Monthly Report also provides interesting information on this topic. The economists explain the model underlying the analysis and how they came to the conclusion that prices are currently fundamentally, unjustifiably overvalued.

Question
A quick question, Mr Dombret. You say that the ties between governments and the domestic banking sector have tightened even more in some countries this year. Could you tell us which countries you believe are suffering from these risks and how you think the situation is likely to develop?

Dr Andreas Dombret
The ties between governments and domestic banks have indeed tightened further. Our report focuses on financial stability in Germany, I would therefore like to concentrate on German financial stability. However, your assumption that the peripheral countries are primarily affected is not incorrect. And these include very large countries that have recently been characterised in particular by the fact that the resident banks have increased their holdings of sovereign bonds further still. And, ultimately, it is this "doom loop" that triggers mutual contagion. Mutual contagion is definitely a cause for concern. Ms Lautenschläger has outlined in great detail the importance of the single supervisory mechanism. That is one idea of how we wish to sever these ties, or at least work towards doing so.

Question
I have two questions, one for Mr Dombret. With regard to life insurers, you presented two scenarios. I know you don't have a crystal ball, but could you still give us an insight as to which is the more likely scenario, and why? And a question to Ms Lautenschläger. You provided an overview of the comprehensive assessment. For transparency purposes, could you please give us an insight into the timeline? Everything has to be in place by November 2014. What will be the exact sequence of the stages you have presented over this period? Is there a stage which you regard as being more important than any of the others?

Sabine Lautenschläger
Well, I do not wish to regard one stage as more important than the others. The first stage is the risk assessment. This means that supervisors will obtain a very close insight into risk management and the capital situation across all types of risk. This means that they will give thought to what types of business lines, and to what extent, in particular, are included in "risky portfolios", which will then be subject to particularly close review in the second phase. I would regard this phase as a particularly material element of our own preparations; and a sort of quality assurance will also be conducted by the ECB and other national supervisory authorities. The second phase relates to currently existing positions, valuations, etc. I presume that the first phase will be finished by around February, with the second phase then subsequently beginning. That will be what is known as the balance sheet assessment. There will be relatively comprehensive reviews based on the results of the first phase, a spot-check. I expect it to last until June. In the end, they will have to look at the data supplied by the banks and institutions. They will go into the banks. There will then be a sort of data integrity analysis – to see whether these data also show up in the credit files. Then everything will be compiled. That will be followed by further quality assurance through the ECB and other national supervisory authorities. And then the process will enter the third phase: the stress test will then be conducted based on the outcomes of the first two phases. I expect this to begin in the summer.

Dr Andreas Dombret
The starting point for your question goes back to the slide on page 15 [in Mr Dombret's slideshow] in which the three scenarios are once again briefly displayed. Scenarios are not necessarily about probability; they are model calculations to show vulnerabilities, such as simulated collapses in certain markets. We see no potential threat to German life insurers over the short and medium term. In our opinion, German life insurers will naturally be able to meet their obligations in the short and medium term. The thought presented on page 15 of the charts and which was also mentioned in my remarks is: what would happen in the distant future if we assume these two stress scenarios. We are talking about the year 2023. Anyone claiming that he or she can already say what is likely to happen in 2023 is almost assuredly a charlatan. Nonetheless, the idea is to use a model in order to think about "what could happen". I presented the two scenarios to you. In one of them, the yields on government bonds are similar to those on Japanese government bonds.  And the more severe scenario is one in which contagion spreads to the other asset classes. My personal experience is: if we even experience the mild scenario, it's just a relatively small step to the more severe scenario. The main question is actually this: will we enter this scenario, and, by that time, will insurers have been able to take steps – effective steps – to temper this scenario? I cannot give you any probability with regard to the scenarios. All I can tell you is where the vulnerabilities are and what that would mean for the German life insurance market. In this simulation, we have not included all German life insurers, but the 85 largest German life insurers. However, it shows clearly that, if we were to encounter stress scenarios, such as have already materialised in countries like Japan, then nearly half of the German life insurance market would indeed suffer losses. To make it even more clear: they would then be confronted with a coverage ratio of less than 100%, which is naturally a worrisome situation for a life insurance company. However, that has nothing to do with a short-term or medium-term outlook or even a probability in the narrow sense, but is intended to illustrate the vulnerability of the coverage ratio, which, of course, has already fallen. I have already given you the two figures: 169% at the end of last year and falling further, from an original level of 186%. That is naturally a development we do not particularly wish to see for reasons of financial stability.

Question
Ms Lautenschläger, can you tell us whether you've applied for the position of top supervisor? And, if not, what preconditions should the ideal candidate have? Do you have a favourite?

Sabine Lautenschläger
I did not answer this question last year, and I will not answer it this year, either. What skills does the ideal candidate need to have? I think, a whole lot of experience in banking supervision, experience and knowledge of international regulation if possible, experience in international negotiations, in the Basel Committee, for instance, or at the European Banking Authority, to be well-networked with all other supervisory authorities in the eurozone, Europe, the United States and Asia. Stamina, being a team player, the desire to shape events and intelligence are also material factors.

Question
Mr Dombret, in your remarks you mentioned the risks of low interest rates to German savers. Precisely this was denied by Mr Cœuré a few days ago, who said that higher interest rates would be a much greater threat to German savers. Which of the two of you is wrong?

Dr Andreas Dombret
I'm not sure those two statements actually contradict one another. All I said was that one man's joy is another man's sorrow. There are certainly investors, shareholders, persons investing in real estate or building a house, who are pleased. Savers are probably less pleased. By the way, it has quite a harsh impact on charitable foundations, too, if their assets have a relatively low return.  However, I also mentioned inflation expectations and contrasted them to low inflation figures. We believe that the very expansionary monetary policy is currently appropriate. Thus, to that extent this involves a balancing act for savers between very low returns on their savings deposits, on the one hand, and the proper monetary policy measure to be taken by the ECB Governing Council and the Eurosystem with regard to inflation figures, on the other. In this context, the word "appropriate" is relatively unambiguous.