The macro-financial environment during the reporting period was characterised by the still noticeable effects of the energy price crisis, elevated inflation and significantly higher interest rates. Non-performing loans and risk provisioning increased significantly from a relatively low level due to subdued economic activity and a higher interest burden at the end of 2023. The economy is currently showing signs of recovery. However, a considerable share of loans to companies and households still needs to be refinanced at higher interest rates, which is likely to increase borrowers’ interest burden further in the future. Looking ahead, this could contribute to rising loan defaults in the banking sector despite the somewhat brighter economic outlook. Overall, the German banking sector proved stable. Banks increased their interest income during the reporting period, also because their pass-through of higher interest rates to depositors was relatively low. Banks also used their profits to increase their capital ratios. Looking ahead, however, the banking sectors’ interest income is likely to decline. German credit institutions should take advantage of the fact that they are currently generating higher profits to further strengthen their tier 1 capital and thus their resilience.

Real estate markets, especially for commercial properties, have seen a further decline in prices. The downturn in residential real estate eased off recently, while the outlook for commercial real estate remains subdued as a result of structural adjustments in demand. The high vulnerabilities that built up in the German financial system during the years of low interest rates have been receding in an orderly, though very slow, manner so far. In addition, the current environment is characterised by geopolitical risks which also increase the threat of cyber-attacks. Overall, the vulnerabilities in the financial system remain significant, and a disorderly materialisation of risks cannot be ruled out.

The current risk situation as well as the persistent vulnerabilities underline the need 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 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 considers the package still appropriate in the current macro-financial environment. It has not identified any adverse 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. 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.