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First Fi­nan­cial Sta­bil­i­ty Com­mit­tee re­port to the Ger­man Bun­destag on the fi­nan­cial sta­bil­i­ty sit­u­a­tion and trends

The low interest rate environment is placing earnings pressure on many financial market players and poses a particular challenge to German life insurers. The Financial Stability Committee presented these and other topics in its first annual report to the German Bundestag on 18 June 2014.

The Financial Stability Committee’s report describes the current financial stability situation and trends and provides information about the Financial StabilityCommittee’s activities during the period from its establishment in January 2013 up until March 2014. The Financial Stability Committee noted that the financial stability environment improved in Germany during the reporting period. However, there are a number of risks. For example, there are still vulnerabilities in relation to claims against debtors from countries that have been particularly hard hit by the European debt crisis and against economically weak sectors. Additional challenges could also result from structural changes in the financial system, due to the increasing importance of shadow banks, for example. Furthermore, the ongoing low interest rate environment is also having an impact on the stability of the German financial system.

During the period covered by the report, topics discussed included the European debt crisis, risks associated with the search for higher yields, and a comprehensive assessment of banks to be supervised by the ECB in future. Due to the fact that its competence is limited to Germany, the Financial Stability Committee focused on issues falling within the jurisdiction of the German government, BaFin and other public bodies in Germany.

In general, low interest rates and generous financial framework conditions can provide fertile ground for a build-up of risks to financial stability. With this in mind, the Financial Stability Committee paid particular attention to trends in the residential real estate sector. The Financial Stability Committee did not detect any self-reinforcing spiral of unsustainable price increases, rising debt levels and easing of lending conditions during the period covered by the report. However, it will continue to carefully monitor developments in residential real estate market. The low interest rate environment is also exacerbating weak earnings at banks and putting pressure on the profitability of life insurers.

The Financial Stability Committee also decided to continue monitoring the potential impact of foreign shadow banks on financial stability in Germany. Finally, the Committee worked on developing its own strategy and on assessing and operationalising macroprudential instruments so that competent bodies are able to counteract negative developments as needed.