The German financial system has so far digested the pandemic without major setbacks – also thanks to billions in government aid for companies. But there are risks, especially in the real estate market.
The Bundesbank sees the widespread rise in prices for houses and apartments in Germany with growing concern.
“According to our calculations, the prices of residential properties are 10 to 30 percent above the value that is justified by fundamentals. We are increasingly seeing that outside of the metropolitan areas, too, “said Bundesbank Vice-President Claudia Buch at the presentation of the Deutsche Bundesbank’s financial stability report on Thursday in Frankfurt.
“Rising real estate prices can be critical for financial stability if more loans are granted with greatly relaxed lending standards and rising prices are expected,” Buch explained. Around half of the bank loans for residential property have a fixed interest period of more than ten years.
“A high proportion of long-term loans and investments makes the German financial system vulnerable to interest rate risks,” explained the Bundesbank. Buch warned: “Risks from real estate financing must be limited.” The European Central Bank (ECB) also recently warned of increasing risks in real estate markets in its financial stability report.
Assessment of the financial system during Corona
Overall, the German financial system worked well during the corona pandemic, the Bundesbank reported. The feared bankruptcy wave in the corporate sector did not materialize. The central bank currently does not see any signs that companies that are actually not viable are being artificially kept alive with state aid. “At the moment we see no evidence that we are getting zombified,” said Buch. But you have to watch the situation in the corporate sector very closely. “We certainly do not want to get into a situation where we delay bankruptcies.”
Overall, the extensive government measures would have protected the financial sector from losses, stated Buch. “But vulnerabilities continue to build up – in relation to negative macroeconomic developments and especially on the real estate market,” affirmed the Bundesbank Vice-President.
The Bundesbank board member responsible for banking supervision, Joachim Wuermeling, stated: “The German financial system is currently sufficiently resilient to be able to cope well with a slowdown in economic development.” Banks could use the capital buffers that have been built up to prevent possible restrictions on lending. At the same time, Wuermeling warned that financial institutions would have to arm themselves in the event of a change in the interest rate environment.
Possible setbacks
Buch said: “The risk of increased inflation in the medium term has increased.” If the rise in the rate of inflation turns out to be significantly stronger or longer than expected, interest rates on the financial markets could “rise noticeably”, explained Buch. «That would result in market corrections and price losses. That would hit the banks directly. ” It would become more expensive for banks to get fresh money, but earnings would only increase slowly. Buch emphasized: “Now is the right time to prevent future risks.”
In order to prepare banks even better for possible setbacks, the Bundesbank is in favor of rebuilding the so-called countercyclical capital buffer. This buffer was increased to 0.25 percent in 2019, but in the wake of the pandemic, the supervisors reduced it to zero percent on April 1 of last year. Basically, this additional capital buffer is intended to increase the resilience of banks in times of crisis. But everything that the institutes put in equity in the provision is lacking in their day-to-day business.
Source From: Stern
Jane Stock is a technology author, who has written for 24 Hours World. She writes about the latest in technology news and trends, and is always on the lookout for new and innovative ways to improve his audience’s experience.
