The risks to the stability of the German financial system continued to increase in 2019, according to the Bundesbank. Last year, it had expected robust economic development and a slow rise in interest rates, which would have strengthened financial stability. But these expectations have not been fulfilled.
The European Central Bank (ECB) remained true to its policy of cheap money in the autumn. "The low interest rates are putting increasing pressure on the interest margins of institutions, putting a strain on their profitability and thus posing a risk to financial stability," said Joachim Wuermeling, who is the Bundesbank's Chief Financial Officer. In addition, since the beginning of the year the economic situation in Germany has deteriorated noticeably. This was largely due to unfavorable external developments, such as increasing trade tensions and weaker global investment.
"A slump in the economy could make the financial system sensitive"
In light of the economic downturn and low interest rates, the Bundesbank warns of increasing risks for the German financial system. "An unexpected economic collapse and abruptly rising risk premiums could make the German financial system sensitive," said Bundesbank Vice President Claudia Buch at the presentation of the Federal Reserve's Financial Stability Report.
The experts of the Bundesbank are worried that banks are increasingly granting riskier loans. In the event of an economic downturn, institutions could therefore be more heavily burdened by write-downs and defaults.
The Bundesbank is still paying close attention to the trend towards rising prices in the German real estate market. There is a risk "that market participants continue to over-optimistic about the past, overestimating the value of collateral," Buch said.