The President of the Association of German Pfandbrief Banks (VDP), Georg Reutter, has noticed a noticeably increased willingness to exchange information at the Federal Financial Supervisory Authority (Bafin) since Mark Branson became President of the authority in August 2021.

Despite the friendly welcome from the CEO of DZ Hyp, the former head of the Swiss Financial Market Supervisory Authority showed a clear edge at the annual reception of the association, to which the most important German real estate financiers belong.

Markus Fruehauf

Editor in Business.

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"The financial cycle is at an inflection point," Branson said.

The Briton with Swiss citizenship sees the current situation, characterized by the risks of the Ukraine war, high inflation and rising interest rates, as extremely complex.

Although Branson attested to the banks' high level of resilience, this must now be preserved all the more.

After all, bank customers, companies and households are facing major challenges in view of high price increases and the threat of recession.

"This is not the time to free up equity," Branson defended the countercyclical capital buffers that will come into force on February 1, 2023, which the Bafin, together with the Federal Ministry of Finance and the Bundesbank, decided a year ago.

"Golden period over for now"

These additional capital requirements are also aimed at the real estate market, where prices have risen significantly in recent years.

But lately the development had turned.

In the third quarter, for the first time since 2011, the VDP recorded a fall in prices.

"The golden period is probably over for the time being," said VDP President Reutter.

He blamed the increased interest and inflation rates, real income losses for potential buyers and political and economic uncertainties for this.

“We expect moderate price declines over the next few quarters – and maybe longer.

However, we do not expect prices to slide,” he said.

For him, the German real estate market as a whole is too stable and the underlying financing practices of the institutes are solid.

Branson referred to the currently not very high risk provisions.

He recommended that the institutes adopt a very conservative pension policy in order to be prepared for loan defaults.

The banks should also test the pain limits of the auditors.

Branson referred to the higher risks in real estate financing.

In the first half of the year, 15 percent of the newly granted loans went to debtors, who had to spend 50 percent of their net income on debt servicing.

Branson believes a hard landing is possible in the commercial real estate market.

Decrease in real estate loans

That is why he defended the capital buffers that Reutter had previously criticized.

The VDP President considers the equity base of the banks to be so comfortable that they could also survive difficult phases.

At the end of September, the Bundesbank put the surplus equity, which exceeds the regulatory requirements in the German banking system, at 150 billion euros.

“Germany needs every newly built apartment.

A regulation that makes lending scarce and more expensive does not fit in,” warned Reutter.

After a strong first half of the year, he expects real estate lending to decline sharply in 2022 as a whole.

The decline in lending is expected to continue at least until mid-2023.

For Branson, countercyclical capital buffers are a good times tool to maintain resilience in crises.

Despite higher interest income, he expects a weak year for German banks.

In terms of profitability, they are second to last in Europe, ahead of Greek banks.

A high burden results from the turnaround in interest rates, which leads to valuation losses in the bond portfolios.

According to the Bundesbank, the hidden valuation reserves of savings banks and Volksbanks fell by 21.8 billion euros in the first half of the year.