Bundesbank warns that the German banking sector is facing gloomy skies.
Vice President Claudia Buch of the Bundesbank stated on Wednesday that although Germany’s financial institutions are currently well capitalized, they nonetheless confront difficulties like unrealized losses, weak lending demand, and rising interest costs.
In the last year, interest rates have increased at the quickest rate on record. Banks have handled the shift successfully, but there are hazards associated with the new operating environment, such as a significant decline in the value of the securities that lenders hold.
“Almost two-thirds of savings banks and credit cooperatives now have unrealized losses throughout their banking book, which comprises loans as well as securities,” Buch stated in a statement. “Life insurers are in a similar situation.”
Because book values are generally higher than current market values, the Bundesbank issued a financial stability study cautioning that selling securities could result in losses and potentially cause liquidity shortages during difficult times.
Buch issued a warning, stating that future increases in interest rates are expected to squeeze margins and negatively impact earnings.
“Our simulations show that if banks had passed on higher interest rates at a similar pace as they had done in the past, their net interest income this year would be 29 billion euros, or one-third, lower,” Buch stated.
Since corporate demand is low in a recessionary environment, banks will find it difficult to offset greater costs through an increase in loan volumes.
The market for commercial real estate seems particularly fragile, which raises credit risks and adds to the problems.
However, bank profits are now strong, allowing lenders to set aside funds to handle any potential challenges, according to Buch.
“Even in adverse scenarios, financial institutions should have sufficient levels of capital and liquidity to be able to absorb shocks on their own,” Buch stated.
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