General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
July 05, 2018

IMF published its staff report under the 2018 Article IV consultation with Germany. Directors noted that profitability in the bank and life insurance sectors remains low and that restructuring efforts must be accelerated to durably strengthen resilience and reduce risks. They stressed the importance of continued supervisory attention to progress in implementing restructuring plans and reducing interest rate risk in banking and insurance.

The staff report highlights that completion of Basel III, as well as other recent regulatory changes, may have important implications for large German banks. After a long period of favorable economic conditions, banks’ internal risk models may underestimate risk-weights. The introduction of the 72.5% output floor is aimed to limit the effects of sharp re-assessments of risks on bank capital. As the use of internal models is more pervasive in large banks, this measure will affect mostly this group. In addition, the report highlighted that the Markets in Financial Instruments Directive (MiFiD II), which came into force in January 2018, aims to increase transparency and efficiency in financial trading, but may also add regulatory compliance costs in the larger banks. Furthermore, the 2017 minimum requirement for own funds and eligible liabilities (MREL) policy of EU sets targets that are binding only for larger/more complex banks in the Single Resolution Board remit, while smaller and medium-size institutions are not yet affected. Few banks are expected to face funding shortfalls to meet MREL target and subordination requirements are facilitated by recent changes to the German Banking Act.

In the banking sector, the regulatory capital ratio has increased, but the cost-to-income ratio and leverage remain high. Risk-weighted capital stood at comfortable levels, supported by favorable macroeconomic conditions and declining risk-weighted asset density, and is improving for all categories, except large banks. Non-performing loans (NPLs) continue to decline and provisioning for impaired shipping loans is leveling off. As noted in the 2016 Financial Sector Assessment Program (FSAP), international experience suggests that macro-prudential tools should be deployed early to be most effective. It is therefore important that the macro-prudential framework is sufficiently nimble such that instruments can be utilized preventively to avoid the build-up of vulnerabilities. The macro-prudential toolkit should be strengthened. New tools—loan to value (LTV) caps and amortization requirements—were legally created in 2017, a welcome development. However, income-based instruments, such as the debt-to-income ratio and the debt-service-to income ratio, are not included in the legislation. These tools, which can help prevent an excessive build-up of debt by households when house prices are rising rapidly, should be added.

Large German banks continue to underperform relative to the European peers. To keep up with cost-reduction targets, the German global systemically important bank (G-SIB) presented an updated restructuring strategy to refocus activities in Europe and reduce personnel costs by shrinking its investment banking business. Overall, the financial market stress is assessed to be low, capital buffers in the banking and life insurance sectors are deemed comfortable. Nevertheless, accelerating restructuring, restoring profitability, and reducing interest rate risk remain the key priorities in the banking and life insurance sectors. Continued supervisory attention to interest rate risk and implementation of restructuring plans, including through Pillar 2 measures, remains essential. The report also reveals that low interest rates and the introduction of Solvency II are forcing some restructuring in the life insurance sector. Solvency ratios, according to Solvency II, have improved overall, alongside the increase in long-term yields, since late 2016. However, a majority (nearly 70%) of life insurers rely on transitional measures to calculate their solvency capital requirement. As was noted in the Bundesbank’s 2017 Financial Stability Report, 14 life insurers would not meet the Solvency II minimum requirement as of end of 2016 without transition measures.

 

Related Link: Staff Report

Keywords: Europe, Germany, Banking, Insurance, Securities, Solvency II, Basel III, MiFID II, NPLs, Restructuring, IMF

Related Articles
News

ECB Updates Validation Checks and List of Identifiers Under AnaCredit

ECB updated the AnaCredit validation checks (Version 1.4) and the list of national identifiers (version 2.4) for AnaCredit reporting.

March 21, 2019 WebPage Regulatory News
News

BCBS Publishes Results of the Basel III Monitoring Exercise

BCBS published results of the Basel III monitoring exercise based on data as of June 30, 2018.

March 20, 2019 WebPage Regulatory News
News

EBA, FCA, and PRA Agree on MoU Template for Supervisory Cooperation

EBA, FCA, and PRA announced that they have agreed on a template for the Memorandum of Understanding (MoU) that sets out the expectations for supervisory cooperation and information-sharing arrangements between UK and EU/European Economic Area national authorities.

March 20, 2019 WebPage Regulatory News
News

EBA Publishes Reports Monitoring the Implementation of Basel III in EU

EBA published two reports measuring the impact of implementing the final Basel III reforms and monitoring the implementation of liquidity measures in EU.

March 20, 2019 WebPage Regulatory News
News

HKMA Publishes CoP on Loss-Absorbing Capacity Requirements of Banks

HKMA issued, in relation to the Financial Institutions Resolution (Loss-Absorbing Capacity Requirements—Banking Sector) Rules (LAC Rules) a chapter of a code of practice (LAC CoP) under section 196 of the Financial Institutions Resolution Ordinance (FIRO).

March 20, 2019 WebPage Regulatory News
News

BCBS Publishes Results of Survey on Proportionality in Bank Regulation

BCBS published a report presenting the results of a survey conducted on proportionality practices in bank regulation and supervision.

March 19, 2019 WebPage Regulatory News
News

US Agencies Adopt Interim Rule to Facilitate Transfers of Legacy Swaps

US Agencies (FCA, FDIC, FED, FHFA, and OCC) are adopting and inviting comments on an interim final rule.

March 19, 2019 WebPage Regulatory News
News

HKMA Expects Banks to Manage Risks Related to Crypto-Asset Exposures

HKMA issued a statement announcing that it expects authorized institutions to take note of the BCBS statement on crypto-assets and its prudential expectations.

March 18, 2019 WebPage Regulatory News
News

SNB Issues Form on Solvency Risk of Counterparties in Interbank Sector

SNB released form (Version 5.00) and related documentation for reporting solvency risk of counterparties in the interbank sector.

March 18, 2019 WebPage Regulatory News
News

EIOPA Requests Data on LTG Measures from Insurers Under Solvency II

EIOPA has requested the European Economic Area insurance undertakings, which are subject to Solvency II, to provide information on the long-term guarantee (LTG) measures.

March 18, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2769