The German financial system remained resilient in the second half of 2024. Macro-financial conditions improved gradually over the course of the year, and existing vulnerabilities declined slowly and in an orderly manner. Challenges remain, however, especially given the persistently muted growth outlook, geopolitical tensions and global uncertainty. Banks were able to take advantage of the exceptionally strong rise in interest rates in 2022 and 2023 and to increase their interest income. Interest income is expected to decline going forward. German non-bank financial intermediaries (NBFI) also weathered the rise in interest rates well. However, life insurers and open-end real estate funds in particular are exposed to liquidity risk, amongst other things. Cyber risks remain material and can potentially pose a significant threat to financial stability. Weak economic growth and structural challenges are weighing on the corporate sector and may lead to increasing credit risk in the future. Overall, systemic risk in the German financial system remains elevated.

In the past half year, the German Financial Stability Committee (FSC) dealt, amongst other things, with risks from the residential real estate sector. Residential real estate prices have stabilised. However, given the current economic weakness and the structural changes in the German economy, the outlook for the hitherto fairly robust labour market is fraught with uncertainty. The commercial real estate sector continues to face challenges. The credit quality of commercial real estate loans is deteriorating. The stock of non-performing commercial real estate loans rose sharply last year and is now relatively high. Commercial real estate prices stopped falling recently but transaction volumes remain low. Further price declines cannot be ruled out. Risks from the commercial real estate sector are therefore elevated. However, taken in isolation, they appear to be manageable for the financial system as a whole.

The resilience of the financial system needs to be preserved given continuing challenges to financial stability. The package of macroprudential measures adopted by the Federal Financial Supervisory Authority (BaFin) is making an important contribution to this objective. The package of measures consists of the countercyclical capital buffer (CCyB) of 0.75% of risk-weighted assets for domestic exposures and the sectoral systemic risk buffer (sSyRB) of 2% of risk-weighted assets for loans secured by residential real estate. The German FSC considers the package still appropriate in the current macro-financial environment. It has not identified any adverse effects on lending or lending rates. The continued weak lending dynamic is driven by low demand. The German FSC is monitoring developments closely. If necessary, the FSC can recommend that the measures be adjusted flexibly to a change in the risk situation. The FSC’s member institutions are assessing on an ongoing basis whether further measures will need to be taken to preserve financial stability.

Here you can find an overview of all FSC Communication.