2023-11-23 18:25:42
The German financial system has so far coped well with the rapid rise in interest rates – but the effects could still cause problems for the banks. Bundesbank Vice President Claudia Buch explained this on Thursday when presenting the 2023 Financial Stability Report for Germany. “The financial system has dealt with the rise in interest rates well so far, but the effects have not yet fully materialized,” warned Buch. After all, there has practically never been a comparable increase in short-term interest rates in the past 25 years.
The revaluation of interest-bearing securities in banks resulted in balance sheet losses. The institutes could have absorbed this through hidden reserves. But this is not possible indefinitely. “Almost two thirds of the savings banks and cooperative banks now have hidden charges in the entire interest book, which includes both securities and loans,” said Buch: “The situation is similar with life insurers.”
In many cases, banks accounted for securities at amortized cost. This means that the book values would often be higher than the current market values, and a sale would result in losses. “The resulting hidden burdens can lead to liquidity bottlenecks in times of stress,” said the Bundesbank Vice President: “Overall, it would therefore be too early to give the all-clear.”
Credit risks from commercial real estate
The report also deals extensively with the risks posed by the fall in house prices. “In the short term, we see particular risks from the commercial real estate sector,” said Buch. “Risks from the financing of residential properties are still limited, but should remain the focus of institutes and supervisors.” Demand for private residential properties has fallen particularly sharply. However, the good labor market situation supports the debt sustainability of private households.
Around 40 percent of private real estate loans in Germany also have a fixed interest rate of at least ten years and will only be refinanced in around five years. This reduces interest rate risks for households and shifts these risks to the banks, said Buch. The interest rate fixation on loans for commercial real estate is shorter: “Interest rates are likely to rise in the short term on around a third of loans for commercial real estate,” said Buch: “Banks are already demanding higher interest rate premiums than last year.”
When it comes to residential real estate last year, the Bundesbank estimated that there were price exaggerations in Germany of 20 to 30 percent – and in the big cities even more than 35 percent. The Financial Stability Report now contains the sentence: “Adjustments in the real estate market can take several years.” When asked, Buch said that she could not provide a forecast for the further development of house prices. Prices have now fallen by around 10 percent.
However, she does not assume that the exaggerations in real estate prices are “completely gone”. In the past, the Bundesbank deliberately did not speak of a “bubble” in the German real estate market, but rather analyzed possible exaggerations using a set of indicators. The reference to the long duration of adjustments in the real estate market refers, for example, to the fact that it often takes time until real estate loans expire and certain consequences only then occur.
Maintain capital buffer for banks
Buch believes that the additional capital buffer for banks that has been required since last year is still appropriate: “Releasing the buffer would only be advisable if there was a threat of a credit crunch due to high losses.” That is currently not the case.
The financial stability report goes on to say that the number of corporate bankruptcies has increased, but is still well below its long-term average. The real estate and housing sectors are particularly affected by insolvencies – with a share of 30 percent of loans to companies, an important sector for banks.
Savings banks and cooperative banks have already increased their risk provisions, and individual value adjustments and non-performing corporate loans rose slightly for the first time in 20 years.
Overall, however, the value adjustments are still at a low level.
Christian Siedenbiedel Published/Updated: , Recommendations: 46 Jan Hauser Published/Updated: , Recommendations: 8 Christian Siedenbiedel Published/Updated: Recommendations: 8
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