For it to be credible, we need commitment on sound backstops as a fall-back option for fulfilling capital needs. In Japan, such a close inspection of bank balance sheets was carried out in 2002. It proved to be an important step to recognising losses and cleaning balance sheets to eventually set off a gradual recovery with credit expansion in Japan. Second, one of the objectives of a European banking union is to delink banks from their sovereigns. That also implies that bank funding costs will depend on the quality of banks’ assets, and not on the location of their headquarters. Achieving this would mark a milestone in that it would establish a single capital market throughout Europe that companies can tap into. A single capital market, in turn, provides better financing for companies and eases productive investment, which will revitalise the European economies. Ultimately, it will be decisive in ensuring that Europe avoids a repeat of Japan’s “lost decade”, during which zombie banks poorly allocated financing across firms. Third, orderly deleveraging in the euro area also requires that the restructuring and resolution of individual banks will not endanger financial stability or put public finances at risk. For this, the institutional framework needs to be solid. This is the rationale  10  Entries of business establishments declined from their peak of 7.4% in 1988 and have not exceeded 5.0% since then, whereas exit rates remained at subdued levels of 2.5–4.0% between 1988 and 2000 and have increased to above 4.0% since then.
Furthermore, real estate prices continued to rise but, as in 2013, momentum remained below the levels observed until 2012. Developments still varied widely from one region to the other. Whereas real estate prices in some regions hardly increased or even decreased, other regions continued to register significant price rises. However, it is still too early for an all-clear. First, the imbalances that have built up since the beginning of the low-interest-rate phase remain at a high level. Second, mortgage interest rates have again dropped to historically low levels in the past few months. And third, there are no broad-based indications of a change in the banks’ risk appetite. Mortgage lending growth at the domestically focused banks has also decreased, but is still markedly higher than overall market growth. Moreover, the affordability risk (loan-to-income ratio) in mortgage lending has continued to rise, interest rate risk remains at a historically high level, and interest rate margins have fallen even further, from a level which was already low. In these exceptional circumstances, banks should ensure that their resilience is high enough to be able to bear the risks taken, even in the event of a marked real estate price correction combined with an interest rate shock. The countercyclical capital buffer plays a significant role in this context by ensuring that banks hold additional capital as a buffer in the current situation. Adding to that, many banks have a surplus of capital with respect to the regulatory requirements. Such surplus capital is especially important under the current circumstances.