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  6  Stiglitz, J. and Weiss, A. (1981)  BIS central bankers’ speeches  3  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”.
And as it is difficult to pass negative interest rates onto retail customers and as the introduction of fees provides only limited remedy, some of the banks will have to adapt their business models. Also, consolidation will continue to be necessary to increase efficiency in the long term. We are now already seeing that concerns about the future profitability of banks are affecting their share prices. The euro area bank index fell by around 40% between August 2015 and August 2016. This decline was driven by, among other things, a worsening outlook for the global economy and growing concern about the effects of the low interest rate environment and nonperforming loans. When banks’ share prices fall, their cost of equity increases, which could then reduce the net return on lending. This may cause banks to become more conservative in their lending in future and to raise the cost of lending. Internal calculations have shown that a decline of around 10% in a bank’s share price reduces corporate lending by around 0.5 percentage point. Allow me, however, to comment on the sometimes severe criticism, especially from Germany, that we face: the German banking sector is one of the largest in the euro area but at the same time it’s the least efficient. German banks have a cost-income ratio of 73%, which is much higher than that of the rest of the euro area.