IMF Publishes Reports Under 2019 Article IV Consultation with Germany
IMF published its staff report and selected issued report in context of the 2019 Article IV consultation with Germany. Directors welcomed the progress in implementing the FSAP recommendations. They noted the low profitability in both the bank and life insurance sectors, the elevated macro-financial vulnerabilities, and the rapidly rising real estate prices in dynamic cities. Directors underscored the need to monitor interest rate risk and accelerate restructuring efforts to durably enhance financial sector resilience. They welcomed the activation of the countercyclical capital buffer (CCyB) and encouraged further steps to address data gaps that would enable a fuller assessment of potential financial stability risks. They also supported expanding the macro-prudential toolkit, including tools for the commercial real estate market.
The staff report highlighted that low profitability continues to weigh on the banking sector, eroding the ability of banks to generate capital organically and putting them at risk in the event of adverse earnings shocks. Large German banks continue to under-perform European peers in market valuation, reflecting high operating costs, outdated IT systems, provisions for compliance violations, and in some cases legacy costs from exposure to the shipping industry. The full adoption of Basel III—especially the introduction of an output floor for internal risk models—is expected to substantially increase German banks’ minimum capital requirement. As of mid-2018, most German life insures’ solvency ratios were well above the 100% threshold set by supervisors, although nearly two-third of them relied on transitional measures and the dispersion was large. The report mentions that supervisors should continue monitoring interest rate risk and press for faster progress in implementing restructuring plans in both banking and insurance sectors.
According to an analysis by Bundesbank, the average tier 1 capital ratio of German banks would be lower by nearly 2 percentage points if they used historical level of risk provisioning. Meanwhile, banks that rely on internal models to calculate regulatory capital have reduced risk-weights and there is evidence of “search for yield” behavior. These trends, alongside rising real estate prices and weak bank profitability, point to a rise in macro-financial vulnerabilities. Given the buildup of macro-financial vulnerabilities, a tightening of macro-prudential policies is appropriate to enhance resilience in the banking system. In May, the Financial Stability Committee recommended to raise the CCyB by 0.25% and banks have 12 months from the beginning of third quarter of 2019 to meet the new requirement. The relatively small increase in the CCyB should have limited impact on credit supply, which is only now recovering after nearly two decades of deleveraging.
The assessment concludes that additional macro-prudential action is needed to guard against imbalances in the real estate sector; these actions could include urgently addressing data gaps, considering prompt activation of the existing borrower-based measures, and expanding the macro-prudential toolkit. The authorities shared the view that risks to financial stability are building up, yet did not see acute systemic risks. Based on the available indicators and information, the authorities saw no substantial increase in risks to financial stability stemming from the flow of new housing loans, which would require an activation of sector-specific demand-side macro-prudential policy tools.
Related Links
Keywords: Europe, Germany, Banking, Insurance, Article IV, FSAP, CCyB, Systemic Risk, Macro-Prudential Policy, Basel III, Financial Stability, IMF
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
IAIS Publishes Global Insurance Market Report for 2018Related Articles
MAS Concludes Blockchain Payments Prototype Shows Commercial Potential
MAS and Temasek jointly released a report to mark the successful conclusion of the fifth and final phase of Project Ubin, which focused on building a blockchain-based multi-currency payments network prototype.
PRA Publishes Public Working Draft of XBRL Taxonomy 1.2.0 for Insurers
PRA published a public working draft, or PWD, of version 1.2.0 of the BoE Insurance XBRL taxonomy, along with the related technical artefacts.
CPMI Report Sets Out Building Blocks to Enhance Cross-Border Payments
CPMI published a report that sets out nineteen building blocks for a global roadmap to improve cross-border payments.
EBA Publishes Phase 2 of Technical Package on Reporting Framework 2.10
EBA published phase 2 of the technical package on the reporting framework 2.10, providing the technical tools and specifications for implementation of EBA reporting requirements.
APRA Updates Reporting Validation Rules in July 2020
APRA updated the lists of the Direct to APRA (D2A) validation rules for authorized deposit-taking institutions, insurers, and superannuation entities.
PRA to Partly Apply EBA Guidelines on Disclosures for COVID Measures
PRA updated the statement that provides guidance to regulated firms on implementation of the EBA guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID-19 crisis.
EBA Updates List of Correlated Currencies Under CRR
EBA updated the 2019 list of closely correlated currencies that was originally published in December 2013.
ESMA Guides on Securitization Repository Data Consistency Thresholds
ESMA published the final report on the guidelines on securitization repository data completeness and consistency thresholds.
FASB Proposes to Delay Implementation of Insurance Contracts Standard
FASB issued a proposed Accounting Standards Update that would grant insurance companies, adversely affected by the COVID-19 pandemic, an additional year to implement the Accounting Standards Update No. 2018-12 on targeted improvements to accounting for long-duration insurance contracts, or LDTI (Topic 944).
APRA Updates Regulatory Approach to Loan Deferrals Amid COVID Crisis
APRA updated the regulatory approach for loans subject to repayment deferrals amid the COVID-19 crisis.
