Recession concerns: Bundesbank warns savings banks and Volksbanks of major losses

Created: 2022-12-06 12:56 p.m

By: Lisa Mayerhofer

Sparkasse: The Bundesbank prepares the industry for hard times.

© Soeren Stache/dpa-Zentralbild/dpa/Archive image

Threatening recession, high inflation, rising interest rates - the environment for the financial sector has become more difficult.

The Bundesbank warns German banks such as savings banks and Volksbanks of the risks.

Frankfurt/Main – The Bundesbank is warning financial institutions to take more precautions in view of the growing risks to financial stability.

"The banks should be able to absorb losses on their own," said Bundesbank Vice President Claudia Buch at the presentation of the Financial Stability Report 2022 in Frankfurt.

Savings banks and Volksbanks are seeing falling capital ratios, however.

Should they come under pressure, it would have an immediate impact on consumers.

Bundesbank: It is more likely that borrowers will not be able to repay loans

Overall, the Bundesbank sees a significantly worsened environment: Economists predict a recession for 2023.

Extremely high inflation has been causing problems for consumers and companies for months.

This increases the likelihood that borrowers will not be able to repay loans.

"The real economic risks have increased significantly," summarized Buch.

The financial system remains vulnerable to these risks.

"That means we really have to make sure now that the vulnerabilities that we've already seen don't turn into injuries that are then very difficult to heal later on," said Buch.

The Bundesbank Vice President warned that the time series used by financial institutions to estimate future credit risks could turn out to be overly optimistic: "So if we see here that loan loss provisions have fallen very sharply, that should not give the all-clear for future risks."

Since the middle of last year, the banks' capital ratios have also fallen slightly.

There are two reasons for this: the still very dynamic increase in loans and the write-downs on securities that have already taken place.

The Bundesbank warns that the core capital ratios of the savings banks and credit cooperatives as well as the large, systemically important banks have fallen by around one percentage point.

Study: Savings banks could face "major financial upheavals".

The banks had to make write-offs and had already largely used up their hidden reserves, explained Buch.

Credit institutes should therefore react and take “careful” risk precautions.

also read

When the 300 euros of the energy flat rate really end up in pensioners' accounts

Property tax “unconstitutional”: law professor advises owners in several federal states to sue

Because: If, for example, a savings bank gets into trouble, the respective sponsoring municipality is threatened not only with considerable tax losses.

There could even be tax refunds to the savings bank - with consequences for the municipal budget that are difficult to assess.

"If the capital markets do not recover by the end of 2022, many communities will face major financial upheavals in the next few years," predicted Ralf Jasny, Professor of General Business Administration and Financial Services at the Frankfurt University of Applied Sciences (Frankfurt UAS), back in the summer .

In a study, he analyzed the currently available 376 annual financial statements for the year 2020 of the German savings banks.

Without capital market income, every seventh German savings bank would be operating in deficit

According to this, numerous financial institutions invest sometimes very large sums in the capital market instead of providing the local population with money and credit services, which would actually be their statutory mandate.

Jasny warns that these investments on the capital market can even lead to losses or insolvency because of the current turbulence.

According to his study, 77 savings banks invest more than 30 percent of their assets in listed securities - and two have even invested up to 66 percent in securities and thus take on considerable capital market risks.

However, the economist also notes that without the income from securities transactions, 68 savings banks would have had to report losses in the millions in 2020.

Without the "booster" from the capital market earnings, every seventh German savings bank would be operating in deficit, explains Jasny.

With material from the dpa