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July 07, 2017

IMF published its staff report and selected issues report in the context of the 2017 Article IV consultation with Germany. The IMF assessment highlights that regulatory capital in the banking sector is adequate, but profitability continues to be weak, reflecting structural factors, some crisis legacies, and the low interest rate environment. Low interest rates, if prolonged, would also negatively affect life insurers, given their extensive reliance on guaranteed products.

The staff report highlights that German banks are generally well-capitalized in risk-weighted terms, but leverage ratios are low in international comparison, especially for large private banks. The number of banks and branches has declined by about 15% since the financial crisis and this trend is set to continue, as the cost-to-income ratio remains on an uptrend in recent years—partially reflecting higher regulatory costs. Following a second year of large losses, Germany’s global systemically important bank substantially increased capital in March-April 2017 and announced a new restructuring strategy. This is a welcome development and has resulted in a decline in the bank’s CDS spreads. However, it is too early to assess whether the new strategy will be able to sustainably return the bank to profitability. The 2016 Germany FSAP pointed out that a formal coordination framework among authorities that would be involved in crisis management (ECB, the Systemic Risk Board, and the competent German authorities) had yet to be developed, but limited progress has been made in this area till now. The authorities also expressed strong commitment to the new EU bank resolution framework and the concept of bail-in. They also shared staff’s concerns about the need to ensure operational readiness in a systemic crisis, but noted that coordination among national and European authorities still needs to be tested in real-time simulation exercises.


The assessment also reveals that solvency buffers of life insurers look comfortable and this owes much to the Solvency II transitional measures. At 286% (on aggregate) at the beginning of 2016, the solvency capital requirement ratio (SCR) for the German life insurance industry was well above the required (100%) minimum and among the highest in Europe. However, some caution is in order when interpreting this figure. Nearly 70% of German life insurers are making use of Solvency II transitional measures. Without these measures, about a third of reporting LI companies (26 insurers) would not have reported sufficient own funds in the first quarter of 2016. The 2016 FSAP and the more recent EIOPA stress tests showed that the German life insurance sector would be severely negatively affected in a “low for long” situation due to large negative duration gaps and the prevalence of guaranteed returns products. New legislation introducing macro-prudential instruments for the real estate market was approved, but left the toolkit incomplete and important data gaps unaddressed. The new legislation broadens the macro-prudential toolkit to include loan-to-value and amortization requirements, but does not include either debt-to-income or debt-service-to-income limits—instruments designed to limit borrower vulnerability to income and interest rate shocks and ensure affordability. Most importantly, the new law does not include any provision for a granular, loan-by-loan database, a central tenet of the past staff recommendation to ensure effective implementation of macro-prudential tools.


Related Links

Staff Report (PDF)

Selected Issues Report (PDF)

Keywords: IMF, Germany, Europe, Banking, Insurance, Solvency II, Article IV, Anacredit

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