The German financial system was stable overall during the reporting period, including in periods of stress like in spring of 2023. At the same time, the vulnerabilities that have built up in recent years remain high. The macro-financial environment changed, exhibiting a combination of weak economic activity and high inflation. The steep and rapid rise in interest rates has caused macroprudential supervisors to devote more attention to interest rate risk, given that higher interest rates weigh on the debt sustainability of households, enterprises and governments. Lower real incomes, higher interest rates and construction costs as well as uncertainty surrounding economic developments significantly reduced demand for real estate loans. Price dynamics have eased for residential and commercial real estate, which also led to price declines in the reporting period. Vulnerabilities in German banks’ portfolios of real estate loans continue to be high.
At the current juncture, the increase in interest rates continues to pose a challenge for the German financial system. Even though the German financial sector has coped well with this challenge so far, the associated risks must not be underestimated. In addition to increased funding costs for financial enterprises, it is possible that securities carried on balance sheets will experience further valuation losses. In parallel to changes in interest margins, competition for customer deposits may intensify, driven by a greater willingness to switch to credit institutions offering higher interest rates. The distress in the US banking sector highlighted the importance of interest rate and liquidity risk. However, the German banking system has solid capital and liquidity positions, and the share of covered deposits is significantly higher on average than at the US banks in distress. A severe economic downturn continues to pose a potential risk to the financial system.
Given the prevailing uncertainties as well as the high vulnerabilities in the German financial system, it is important to preserve the resilience of the German financial system. The package of macroprudential measures adopted by the Federal Financial Supervisory Authority (BaFin) is making an important contribution to this objective. The FSC continues to consider the package of macroprudential measures to be adequate in the current macro-financial environment. The package of measures consists of the countercyclical capital buffer of 0.75% on domestic risk positions and the sectoral systemic risk buffer of 2.0% on loans secured by residential real estate. The FSC has found no evidence that these measures are impairing the supply of credit. The FSC will continue to monitor and assess developments. If necessary, the FSC can recommend that the measures be adjusted flexibly to a change in the risk situation. In addition, the FSC’s member institutions are assessing on an ongoing basis whether further measures will need to be taken to preserve financial stability.