Individual lenders fail to take into account that their behaviour has an impact on the ability of other market participants to bear debt. This applies, for example, when investors are increasingly exposed to the same risks and invest in the same markets. For instance, let us assume that a large number of companies or households simultaneously take out loans to purchase real estate. This situation creates systemic risk because a negative surprise on the real estate market can lead to many of these investors incurring losses at the same time, forcing them to sell off their assets so that they can continue meeting their loan 15  On ‘Black Monday’, 19 October 1987, the Dow Jones index plunged by more than 20%. As a result, equity markets around the world came under heavy pressure. Page 8/16  commitments. This can generate a self-reinforcing spiral of falling real estate prices, more borrowers who can no longer service their debts, and thus greater pressure to sell. Distorted expectations  Moreover, the behaviour of economic agents during a credit boom is not always entirely rational. This brings us to the third factor that can contribute to excesses on the credit market – distorted expectations (cf. slide 12). A glance at the history of financial crises shows: The longer an economic upturn persists, and the higher asset prices rise at the same time, the more over-optimistic economic agents are about future growth.
But, you might say, the behaviour of borrowers and lenders, whether rational or based on distorted expectations, ultimately depends on interest rates. Only if interest rates are low, can such a dynamic develop. Interest rates in turn are strongly influenced by central banks. In the last part of my speech I would like to address this argument, and discuss the question that has come back into focus since the financial crisis: What role do central banks play in the event of excesses and crises on the credit market? The fundamental task of central banks like the SNB is to ensure price stability, while taking due account of economic developments (cf. slide 17). The main instrument they use for this are key or reference interest rates. If, for example, the inflation rate threatens to fall too low, key rates are lowered. This has a positive impact on price development via various channels. 19 One of these is loans: An interest rate cut reduces borrowing costs and creates incentives for expanding the credit supply. This encourages investments and consumer expenditure and ultimately has a positive effect on price development, too. With their interest rate decisions, central banks therefore consciously influence lending practice. If, for price stability reasons, interest rates have to be kept low for a prolonged period, it is possible that over time there  18  SFBC (1998). 19  The literature distinguishes different channels through which monetary policy can impact on aggregate demand and thus inflation.