In the second half of 2023 the German financial system proved stable despite the existence of high vulnerabilities. However, uncertainty remains high in view of interest rate rises, a clouded growth outlook, increased cyber risks and geopolitical conflicts. Credit institutions are currently benefiting from higher interest rates and posting higher profits. Over time, however, interest rates on customer deposits and therefore refinancing costs are likely to rise further, causing the currently elevated interest margins to recede. The higher interest burden is reducing firms’ and households’ debt sustainability. This may be reflected in higher credit defaults in the future. The relatively high market valuations at present increase the risk of significant market price corrections and associated losses for the financial system. In addition, geopolitical tensions increase the risk of cyber-attacks with high damage potential for financial stability. This requires a correspondingly high level of resilience.

In the past half year, the German Financial Stability Committee (FSC) dealt, amongst other things, with risks from the commercial real estate sector. Demand for commercial real estate has continued to decrease, mainly as a result of higher interest rates, both in Germany and internationally. Structural demand adjustments are also taking place, particularly in the area of office and retail real estate. The transaction volume has stabilized at a low level. Recent falls in commercial real estate prices are also gradually reducing the valuations of collateral. Starting from a low level, the share of non-performing commercial real estate loans has risen recently. Several real estate developers and real estate companies are struggling with financial difficulties, including insolvency. For a significant portion of commercial real estate loans, lending rates are likely to rise significantly over the next few years owing to relatively short interest rate fixation periods. This may impair borrowers’ debt sustainability. Credit risks in the commercial real estate sector are therefore elevated. Individual institutions are also exposed to concentration risks in terms of business model and obligor exposure. It is therefore incumbent upon banks to strengthen their risk provisioning sufficiently. Risks from residential real estate loans also remain elevated. Traditionally long interest rate fixation periods will initially protect households from rising interest rates in the medium term. Households have also benefited thus far from a robust labour market. However, the recent fall in house prices and a weak economy are increasing uncertainty about future developments.

Given the continued elevated risks to financial stability, the resilience of the financial system should be further strengthened. The package of macroprudential measures adopted by the Federal Financial Supervisory Authority (BaFin) constitutes an important step towards this objective. The package consists of the countercyclical capital buffer of 0.75% of risk-weighted assets for domestic exposures and the sectoral systemic risk buffer of 2% of risk-weighted assets for loans secured by residential real estate. The German FSC regularly discusses the appropriateness of the measures and has not identified any negative effects on lending or lending rates. The weak lending dynamic is driven by low demand, there are no signs of supply-side restrictions on lending. German credit institutions should take advantage of the fact that the earnings situation remains good at present to further strengthen their tier 1 capital and thus their resilience. A continued high level of cyber resilience is also required. The German Financial Stability Committee will monitor and assess further developments. If necessary, it can recommend that the measures be adapted flexibly to a change in the risk situation. The members of the German FSC examine on an ongoing basis whether further measures need to be taken to safeguard financial stability in Germany.

The German FSC has been issuing regular communications to mark the publication of its Annual Report for several years now. Beginning with this press release, the German FSC will also issue regular communications in December. More regular communication serves to further strengthen the effectiveness and transparency of macroprudential policy.

Here you can find an overview of all FSC Communication.