Mr. Wuermeling, are the German banks prepared for a recession?

Markus Fruehauf

Editor in Business.

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As of today, German banks are prepared for a recession.

However, additional risks are arising from the rise in inflation and the turnaround in interest rates.

In addition, the economic environment has clouded over significantly.

Here, too, the risks have increased.

We are therefore monitoring developments very closely.

Where are the biggest weaknesses?

One weakness of German banks is their low profitability.

Interestingly, large banks are more affected than small ones.

Profitability is important for stability: the higher the profits, the more losses can be covered or buffers built up.

With their equity ratios, which have doubled since the financial crisis, the German institutes are in a very good position.

The excess capital amounts to a total of 150 billion euros, with which the banks can cope with quite a bit.

At this time we are not seeing any increased numbers of non-performing loans or defaults.

However, there are negative indicators such as rating downgrades or higher risk premiums on corporate bonds.

The banks are therefore preparing for higher risk provisions.

When will the turnaround in interest rates lead to higher returns?

This has already been the case with residential real estate.

Interest rates have tripled since the beginning of the year, while banks' refinancing costs have risen much more slowly.

The interest margin has already widened here.

However, due to the increase in yields, banks are registering price losses in their bond and share portfolios.

Are you concerned about the decline in the value of securities investments?

No, 70 percent of the banks will be in positive territory a year after the interest rate turnaround.

This means that the balance sheet losses will be processed and the interest income will have increased.

Interest rate margins also typically widen because deposit rates rise at a slower rate than lending rates.

But the fight for deposits had already started in the run-up to the ECB interest rate hikes.

Negative interest rates were abolished and fixed-term deposit rates were raised.

Low interest rates will not disappear from bank balance sheets anytime soon because of long-term loans.

There are banks that have hedged against interest rate risk by using derivatives.

Other institutes have not done this.

Overall, around half of the German banks have an increased interest rate risk.

As supervisors, we responded to this with substantial equity surcharges.

This was particularly the case for smaller institutions, which use derivatives to a relatively small extent.

However, many were already aware of their own risks and had voluntarily built up a good capital cushion.

Are there special risks for the banks from the high inflation?

Yes, because borrowers face higher costs.

This affects both companies and private households.

The higher cost burden tends to weaken the capacity to service debt, which increases the risk of default.

That is why, among other things, companies that have been heavily financed by borrowed capital must be observed critically.

What significance will the commission income have, which in recent years has been particularly due to the greater willingness of private customers to invest in securities?

In general, investment behavior is very difficult to predict.

After the rise in interest rates, private investors now have alternatives to saving on securities, for example with time deposits or call money.

However, many savers have had good experiences with their securities investments in recent years, which is why there is no reason to expect them to flee.

However, with the rising interest income, the proportion of commission income will generally decrease significantly.

Real estate market slowdown

In the currently difficult stock market environment, the American banks had to give up feathers.

Do you fear a continuation of course corrections?