Frankfurt / Main (dpa) - Interest rates and economic weakness increase, according to the German Bundesbank, the risks to the domestic financial system.
"The vulnerability has increased," said Bundesbank Vice President Claudia Buch at the presentation of the Federal Reserve's Financial Stability Report in Frankfurt. "An unexpected economic slump and abruptly rising risk premiums could make the German financial system sensitive."
Last year, a slowly rising interest rate level was expected. But the European Central Bank (ECB) has cemented the zero interest rate policy in the euro area in autumn again. In addition, trade disputes and Brexit worries are clouding the outlook for the economy.
"Low interest rates are putting pressure on banks' interest margins, putting their profitability at risk, and putting them at risk for financial stability," added Joachim Wuermeling, the Bundesbank's board member responsible for banking supervision. Thanks to thicker capital buffers for crises, however, the resilience in the German banking system has increased.
The experts of the Bundesbank are worried that banks are increasingly granting riskier loans. "The evidence that credit risks could be underestimated is intensifying," Buch said. "More companies are now being financed by the banks, which would be the first to encounter problems in the event of an unexpected economic downturn." In the event of a downturn, banks could be more heavily burdened by write-downs and loan defaults.
The increasing share of long-term residential mortgage loans - meanwhile every second new home loan has a term of more than ten years - could be a problem for banks. For example, when the level of interest rates changes, or when valuations of houses and apartments used as collateral for loans are too optimistic.
The Bundesbank still does not see a dangerous price bubble on the German real estate market - even though the prices for apartments and houses in German cities are estimated to be 15 to 30 percent overvalued by the central bank. "We currently see no evidence that we have a credit-driven speculative dynamics in the markets," said Buch.
The key interest rate in the euro area has been at a record low of zero percent since March 2016. The negative interest rates of currently 0.5 percent, which the European Central Bank (ECB) also requires when banks park their money with them, are increasingly eating away at the financial system.
The ECB is therefore also increasingly looking for possible negative consequences of its very expansive monetary policy for years. "The side effects of monetary policy are becoming increasingly obvious, we must take into account," said ECB Vice President Luis de Guindos on Wednesday. "We have to focus more on the side effects."
In its most recent Financial Stability Report, the ECB concludes that the risks and challenges to financial stability in the euro area have also increased due to the zero interest rate policy. In particular, mutual funds and insurers could mislead the ECB's assessment of taking excessive risk.
Financial Stability Report 2019
Time series ECB interest rates