The economic downturn is almost certain with the dramatic rise in energy costs.

As a result, the risks of the banks are increasingly coming into focus, in particular the extent of the impending loan defaults.

These can put a strain on institutions' equity base, force them to cut back on lending and thus intensify the economy's downward spiral.

If the bank supervisors at the Bundesbank and the Federal Financial Supervisory Authority (Bafin) have their way, the banks are in for a storm.

Markus Fruehauf

Editor in Business.

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However, based on the most recent stress test of 1,300 small and medium-sized institutions, primarily savings banks and cooperative banks, the supervisors do not expect a banking crisis.

This is how Joachim Wuermeling, who is responsible for banking supervision on the Bundesbank board, put it on Wednesday at the press conference on the stress test results in Frankfurt.

Even if the stress test does not reflect the current environment, which is characterized by the Ukraine war, rising energy costs, high inflation and a significant rise in interest rates, Raimund Röseler, Executive Director of Bafin, considers it to be very meaningful.

Because you have received a lot of data that is very helpful in the analysis of the individual institutes and their risk situation.

Hard stress scenario

In addition, a total decline in gross domestic product of 4.7 percent over a period of three years was assumed as a stress scenario.

A much smaller downturn is currently expected, said Wuermeling.

Nevertheless, he and Röseler admitted that looking ahead is still fraught with uncertainty.

"The conditions for a perfect storm are there," said Röseler.

According to him, the institutes must report to the regulator if their equity falls by more than 5 percent due to valuation losses.

According to Röseler, more than a hundred institutes reported this in the current year.

The main reason for this is the valuation losses on bonds as a result of the rise in interest rates.

In the stress test, the stress scenario led to an average deterioration in the institutions' CET1 capital ratio of 3.2 percentage points to 14.5 percent.

The core capital usually consists of the equity components that are immediately liable in the event of losses, such as share capital or retained earnings.

“Most of the German institutes are well capitalised.

However, a low double-digit number of institutes will have to struggle in the event of a significant economic downturn,” emphasized Röseler.

According to him, these institutions would not survive the stress scenario without additional capital injections.

JP Morgan boss fears hurricane

His comparison to a storm was very reminiscent of Jamie Dimon's statement.

The CEO of JP Morgan, America's largest bank, had warned of an "economic hurricane" in the summer.

It's better to buckle up now, was the advice of the boss of the most expensive bank in the world in terms of stock market value.

After all, the German banks can rely on a lavish crisis buffer.

Wuermeling put the excess equity in the banking industry at 151 billion euros.

The total corresponds to the equity surplus after all regulatory requirements have been met.

However, he threw some water into the wine when he pointed out the aggregate consideration.

There are individual institutes whose capitalization is more critical.

Despite this, the Bundesbank board does not fear a credit crunch in the coming year.

Turnaround in interest rates strengthens earning power

Because one factor that was also not assumed to this extent in the stress test is the turnaround in interest rates.

This still weighs on the bond holdings due to the associated price losses.

But in the coming years, interest income will become an important earnings factor in the German banking industry.

Wuermeling rated the plans of the surveyed banks and savings banks as largely cautious.

This creates buffers for negative planning deviations.

The Bundesbank and Bafin conducted the survey in the second quarter of the year.

The interest rate turnaround has not yet been planned for by a large number of institutes, so that the medium-term contributions from the interest result are likely to be more positive due to the rising interest rates.

A short-term burden for the banks due to rising interest rates is generally manageable for the banking sector, said Wuermeling.

"Banks are ready"

"If the banks can withstand this extreme stress test scenario, as the stress test was based on, then they are - as of today - also prepared for what we expect in the coming months," he emphasized.

"Despite inflation, energy crisis, recession, we do not expect that these events will also result in a banking crisis." He warned against being too relaxed: "The banks should not sit back." Because reality is approaching the stress scenario.

The assessments of the earnings situation and resilience of small and medium-sized banks published by the Bundesbank and Bafin demonstrate the robust condition of the credit institutions in Germany, as reported by the umbrella organization of banks and savings banks, the Deutsche Kreditwirtschaft (DK).

The results showed that the approximately 1,300 institutions involved were well prepared for possible stress situations.

The capitalization of the institutes remains at a high level and more than meets the minimum requirements.

The DK also referred to the low interest rate level in the stress scenario, which no longer corresponds to the current situation.