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 Large German banks continue to under-perform European peers in market valuation, reflecting high operating costs, outdated IT systems, provisions for compliance violations, and in some cases legacy costs from exposure to the shipping industry.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.
Keywords: Europe, Germany, Banking, Insurance, Article IV, FSAP, CCyB, Systemic Risk, Macro-Prudential Policy, Basel III, Financial Stability, IMF
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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