Bundesbank warns banks of the risks of the interest rate turnaround
According to the Bundesbank, the negative effects of the rapid rise in interest rates could still cause problems for Germany's banks. Overall, it would be premature to give the all-clear, said Bundesbank Vice President Claudia Buch in Frankfurt on Thursday. This is because the effects of higher interest rates have not yet fully materialized.
"On the one hand, increased economic risks on the financial markets have hardly been priced in so far," explained Buch, who will move to the European Central Bank (ECB) on January 1, 2024, where she will become the top banking supervisor. "Given the high level of macroeconomic uncertainty, there is an increased risk of market price corrections and corresponding losses."
Higher savings interest rates reduce banks' earnings
On the other hand, banks' interest expenses are likely to rise, meaning that the recent significant rise in net interest income will fall again. Many financial institutions are benefiting from the fact that the ECB has raised key interest rates in the eurozone ten times in a row since July 2022 because they earn money from higher lending rates, for example, and receive interest themselves when they park money with the ECB.
However, simulations by the Bundesbank show that if banks had passed on higher interest rates to savers as quickly as in the past, net interest income would have been 29 billion euros lower this year, or a third less.
Sluggish demand for credit
"At the same time, it is becoming more difficult to offset rising interest costs with higher-interest new loans," explained Buch. Many banks have long-term loans with relatively low interest rates on their books, and demand for new financing has been weak in recent months.
On the real estate market, the turnaround in interest rates has led to falling prices. "In the short term, we see risks from the commercial real estate sector in particular," said Buch. "Risks from the financing of residential real estate are still limited, but should remain the focus of institutions and regulators."
In addition, the Bundesbank believes that the transformation of the economy towards greater climate neutrality is likely to increase the risk of loans no longer being serviced. The impending structural change also means "more insolvencies and increasing credit risks", explained Buch.
So far, the German financial system has coped well with the rise in interest rates. However, the Bundesbank believes that banks should use their recently increased profits to strengthen their resilience in times of stress.
"Despite the resilience shown by the German financial system, the Bundesbank encourages banks to utilize their increased profits from higher interest rates to bolster their resilience in uncertain economic situations, as financial institutions across the country's banks should be prepared for potential challenges."
"In light of the Bundesbank's warning about the risks associated with the interest rate turnaround, it's crucial for various banks to critically assess their financial strategies, considering potential consequences on their balance sheets and the overall economic situation, especially as interest rate hikes impact both earnings and demand for credit."
Source: www.dpa.com
