Examples of how the option value to waiting can lead to significant increases in required rates of return are given in Dixit and Pindyck (1994). BIS Review 68/2002  9  Chart 6 Consumption and deflation in Japan, 1985-2002  Note: Inflation is measured using the consumer price index excluding foodstuffs. The overnight interest rate is the nominal overnight uncollateralised call rate. Source: Thomson Financial Datastream. (iii)  Aversion to long-term contracts and excessive resources devoted to hedging inflation risks. As we have seen, high inflation goes hand in hand with greater uncertainty about future inflation. Inflation is, therefore, associated with a positive risk premium to compensate investors for that uncertainty. The longer the time horizon, the greater the risk premium is likely to be. That discourages long-term contracts and interest rates in such contracts will often depend upon future spot interest rates. Floating-rate mortgages are a good example. With a floating-rate mortgage the borrower is exposed to the risk of sharp fluctuations in the proportion of income that is devoted to debt service, as many households in Britain still remember from the late 1980s when interest rates doubled to 15%. Fixed-rate mortgages eliminate that risk, but at the cost of introducing a new risk: the real value of the outstanding debt may change relative to the value of the house. John Campbell and João Cocco (2002) have suggested that a superior contract would be a fixed-rate mortgage where the principal was index-linked. That would reduce both income and capital risk.
[9] There are currently eight globally important banks in the euro area (in France, Germany, Italy, the Netherlands and Spain) holding additional buffers of between 1% and 2%, and 108 other systemically important institutions with buffers of up to 2%. Systemic risk buffers have been activated in five countries, with a range of between 0.5% and 3%, and the countercyclical capital buffers have been announced in seven countries (Belgium, France, Germany, Ireland, Lithuania, Luxembourg and Slovakia) with rates between 0.25% and 2%. For more information, see “Macroprudential measures in countries subject to ECB Banking Supervision and notified to the ECB” on the ECB website. [10] For a discussion of recent CCyB decisions, see Babić, D. and Fahr, S. (2019) “Shelter from the storm: recent countercyclical capital buffer (CCyB) decisions”, Macroprudential Bulletin No. 7, ECB. [11] See, for example, “  Refining the Stress Capital Buffer”, speech by the Vice-Chair for Supervision, Randal K. Quarles, at the Program on International Financial Systems Conference, Frankfurt, Germany, 5 September 2019. European Central Bank Directorate General Communications Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany Tel. : +49 69 1344 7455, E-mail: media@ecb.europa.eu Website: www.ecb.europa.eu Reproduction is permitted provided that the source is acknowledged. Media contacts  Copyright 2019, European Central Bank