According to the Bundesbank, the rapidly rising interest rates could still cause problems for Germany’s banks. Overall, it would be premature to give the all-clear, said Bundesbank Vice President Claudia Buch at the presentation of the financial stability report on Thursday in Frankfurt. The effects of the increased interest rates have not yet fully materialized, says Buch, who will be moving to the European Central Bank (ECB) on January 1, 2024. There she takes over the leadership of the euro zone banking supervision as the successor to the Italian Andrea Enria.
“The financial system must be sufficiently resilient to be able to deal with increased risks and increased uncertainty,” demanded Buch. Just as very few people would have predicted the extent of the interest rate turnaround, just as few people would be able to predict today how the geopolitical situation will develop, which new companies and business ideas will arise, and how and when increased credit and liquidity risks will materialize, said the Bundesbank Vice President.
In the fight against inflation, the ECB has raised the three key interest rates ten times since July 2022. The deposit rate relevant to the financial market that banks receive from the central bank for parking excess funds is four percent. This is the highest level since the start of the monetary union in 1999. The higher key interest rates are now having an impact on the German real estate market. Prices have fallen because borrowing has become more expensive. According to the Bundesbank, risks from the financing of residential real estate for the stability of the financial markets have so far been limited. The good labor market situation supports the debt sustainability of private households. In addition, around 40 percent of private real estate loans have a fixed interest rate of at least ten years; on average, a – presumably – more expensive refinancing will not be possible for another five years.
The Bundesbank warns of risks in the shadow banking market
The situation is different with commercial real estate. The interest rate fixation in this area is significantly shorter than for residential properties. Interest rates are likely to rise in the short term for around a third of loans; Banks are already demanding higher interest rate premiums than last year.
Like the ECB on Wednesday, the Bundesbank also warned of risks in the so-called shadow banking market. These are hedge funds and other asset managers who, like banks, grant loans without falling under strict banking regulations. According to the ECB, the shadow banking sector in the euro zone alone has more than doubled since the global financial crisis from 15 trillion euros in 2008 to 31 trillion euros now.
“Overall, the financial system remains vulnerable to shocks and the challenges of structural change,” Buch continued. Structural change means that previous investment, production and consumption patterns are being questioned or are simply no longer worthwhile. According to the book, the uncertainty is high; credit, liquidity and cyber risks could occur at the same time and reinforce each other. “This requires the institutions to be sufficiently resilient.”