The German Financial Stability Committee (FSC) agrees with the risk assessment and the conclusions of the European Systemic Risk Board (ESRB) in its warning on vulnerabilities in the European financial system. The ESRB’s warning is also addressed at national authorities with responsibility for financial stability. The Committee supports the ESRB’s call to preserve or further build up micro and macroprudential buffers to strengthen banks’ resilience given the prevailing risks. The weakened macroeconomic setting is coming up against vulnerabilities in the German financial system as well. In view of the risk of further asset price corrections, great uncertainty and the threat of an increase in loan defaults, the FSC considers it essential for all financial market players to preserve a high level of resilience to adverse developments. The package of macroprudential measures announced by the Federal Financial Supervisory Authority (BaFin) at the beginning of 2022 is helping to enhance the resilience of the German financial system.

In Europe, the current macro-financial environment is dominated by a high level of uncertainty and a tightening of financing conditions, rising inflation rates and surging commodity prices owing to the Russian attack on Ukraine. In light of these developments, the European Systemic Risk Board released a general warning on vulnerabilities in the European financial system on 29 September 2022, in which it calls on all actors in the European financial system to prepare for adverse scenarios and to preserve and further enhance resilience in the financial sector.

In Germany, following on from the coronavirus shock, macroeconomic developments are now also being impacted by the war of aggression against Ukraine, disruptions to global supply chains, uncertainties about the supply of energy and geopolitical developments. Economic uncertainty is high and forecasts of economic growth have become increasingly gloomy. At the same time, prices for most energy sources and for many other goods and services are rising more rapidly than they have in decades.

This entails significant economic downside risks not only for enterprises in energy-intensive sectors but increasingly for the corporate sector more broadly as well. In addition, higher interest rates will impair the ability of firms and households to properly service their loans going forward. Persistent high inflation also reduces the amount of household disposable income available to service debt. Cumulatively, these developments could result in a future increase in loan defaults. The deterioration in the macroeconomic setting may lead to further corrections in the prices of assets, especially if their underlying value had been overestimated in the past. There is also an elevated risk of cyber attacks.

German financial institutions are well capitalised overall, but should prepare for the significantly altered risk situation. Adequate risk provisioning is important so that banks can better cope with potential setbacks in a challenging environment. All financial market participants should therefore act in a forward-looking manner and assess risks conservatively. The aforementioned package of measures announced by BaFin at the beginning of 2022 is an important contribution towards preserving and enhancing the resilience of German financial institutions. By activating the countercyclical capital buffer and a sectoral systemic risk buffer for loans secured by residential real estate, capital has already been conserved within the system. The capital buffers have not impaired lending. This is evidenced by the increase in lending since the beginning of the year. Going forward, these measures will help to ensure that the financial system can perform its functions even in the event of crisis developments. BaFin can adjust buffers at short notice if required. There is no need to do so at present.