Germany is in the midst of a long period of economic growth and low interest rates. Even though macroeconomic activity in Germany has noticeably lost momentum during the reporting period (April 2018 to March 2019), overall economic utilisation levels remain high. However, three significant, closely-related vulnerabilities are apparent: (i) underestimation of credit risks, (ii) risks arising from real estate lending, and (iii) interest rate risks if interest rates remain very low for a prolonged period or rise abruptly.
Because of the overall cyclical systemic risks, the Financial Stability Committee discussed macroprudential options for action and deliberated on which instruments would be suitable for strengthening the risk-bearing capacity of the banking sector in particular. The Financial Stability Committee concluded that activating the countercyclical capital buffer could be justified given the build-up of risks over a prolonged period. An unexpected sharp economic downturn could affect – and be exacerbated by – the entire banking sector.
The strong pricing trend in the residential real estate market has continued. Despite further price increases, stability risks from new residential real estate lending have so far been limited. However, stability risks may arise from existing residential real estate loans, for example in the event of an unexpected sharp economic downturn. The Financial Stability Committee noted that data on housing loans should be improved further.
Low interest rates continue to put considerable strain on German life insurers. For this reason, the Financial Stability Committee welcomed new regulations for the supplemental premium reserve (Zinszusatzreserve). These regulations provide for slower increases to this reserve.
Advancing digitalisation and networking in the financial system are accompanied by steadily increasing risks of cyber incidents. The Financial Stability Committee uses, among other things, the Bundesbank’s macroprudential cybermapping approach to identify possible systemic contagion channels. There are plans to further develop this tool together with BaFin.
As already stated in the last report, regulatory privileges of sovereign debt instruments are to be dismantled in the medium to long term. The Financial Stability Committee is therefore critical of the European Commission’s proposal to introduce government bond-backed securities.
Ultimately, a disorderly withdrawal of the UK from the EU could result in significant disruptions to the real economy and the financial sector. Resulting corrections in international markets could have an impact on the German financial system.