Banks and microfinance institutions are now obliged to disclose to borrowers the total loan cost to rule out situations where borrowers end up paying more than agreed under seemingly clear terms. 2/5  BIS central bankers' speeches  Running ahead, we think that there is a need for more stringent legislation in that area, considering that banks have adjusted and some of their ‘offerings’ circumvent the requirement of disclosing the total loan cost, that is the amount they are required to make clear to the borrower. Against the background of economic recovery, disbursements of unsecured loans have accelerated. As I have said, this is driven by high inflation expectations (when people expect higher inflation, they try to buy goods on credit) and fairly attractive interest rates. Banks like this situation, without doubt. They are looking for ways to circumvent our restrictions. For example, we have seen a rise in the share of consumer loans (I mean consumer loans, not mortgage loans) with more than five years’ maturity (from the pre-pandemic 11% to 21% in the second quarter of this year). On the one hand, by extending loan maturity, banks reduce monthly payments, making a loan seemingly more affordable to borrowers. Yet, the total amount of debt per borrower is increasing. This is normal for a mortgage that is issued for a long period (and with much lower rates), but those long periods for unsecured loans are unreasonable and are set to entail problems. We already see a deterioration in consumer lending standards.
In fact, a  BIS Review 88/2006  3  study by the ECB shows that the closer a country comes to an excessive deficit, the more likely it is that the forecast the government presents officially will later turn out to be wrong. There is a strong bias towards unrealistic optimism once a country’s deficit approaches 3% of GDP. The same result was indicated in a study by Lars Jonung and Martin Larch. What challenges does the future hold? Let me say something in this respect about the new member states. It is all too apparent that the collapse of Germany’s leading role in fiscal discipline has also set a bad example for some of the larger new member states. This despite the fact that Germany now appears to be in the process of correcting its deficit. Given that public finances did deteriorate so much in Poland, Hungary and the Czech Republic during the first years of this century it is fortunate both for themselves and for the euro area that these countries have postponed joining ERM II and the attempt to rapidly adopt the euro. They have made clear that their government finances must be in order before the process of joining the euro area begins. Had they tried and locked their currencies within ERM II they may well have stayed in that position for a long time, becoming in the meantime targets for speculation – as their poor public finances would have lent little credibility to their overall economic policy.