Bundesbank: German Banks Are Underestimating Risks

German financial institutions underestimate economic risks, which can lead to negative consequences if the situation in the country’s economy worsens, the Bundesbank report on financial stability says.

The document notes that banks are actively issuing loans. Various assets are highly valued in low interest rates and the still strong German economy.

In addition, banks have reduced deductions to reserves for possible losses on loans, which indicates an incorrect assessment of risks, according to the central bank of Germany.

“An unexpected economic downturn and a sharp increase in risk premiums can seriously affect the financial system of Germany,” said Claudia Buch, vice president of the Bundesbank. “One of the triggers could be bad news about the situation in the world economy. Moreover, the consequences of weakening economic growth in others countries for the German economy may intensify.”

The economy of Germany is seriously suffering from trade wars between the US and China amid weakening global demand and problems in the automotive sector.

Germany was barely able to avoid a recession: in Q3, the country’s GDP grew by 0.1% compared to the previous quarter after falling by 0.1% in the II quarter.

The creditworthiness of German companies has improved, but the share of risky loans in bank portfolios is increasing, the Bundesbank noted.

This suggests that in the case of a hypothetical recession, the increase in the number of defaults may be faster than it would be in the case of a more even distribution of risks.

The Bundesbank and other regulators earlier this year have already taken measures to reduce financial risks by requiring banks to create capital reserves in case the situation worsens in the economy. Banks need to create reserves by mid-2020.

“They can use excess capital to fulfill this requirement,” the German central bank stressed.

source: bundesbank.de

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