Featured Product

    IMF Publishes Reports Under 2019 Article IV Consultation with Germany

    July 10, 2019

    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 Large German banks continue to under-perform European peers in market valuation, reflecting high operating costs, outdated IT systems, provisions for compliance violations, and in some cases legacy costs from exposure to the shipping industry.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
    Related Articles
    News

    APRA Issues Interim Update to Policy Priorities for 2021 and Beyond

    In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.

    September 24, 2021 WebPage Regulatory News
    News

    EC Adopts Solvency II and Resolution Rules Package for Insurers

    The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.

    September 22, 2021 WebPage Regulatory News
    News

    OCC Issues Booklets on Regulatory Reporting and Earnings

    The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.

    September 22, 2021 WebPage Regulatory News
    News

    ECB Sets Out Results of Economy-Wide Climate Stress Tests

    The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.

    September 22, 2021 WebPage Regulatory News
    News

    EBA Examines Implications of Increasing Use of Digital Platforms in EU

    The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.

    September 21, 2021 WebPage Regulatory News
    News

    HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact

    The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.

    September 21, 2021 WebPage Regulatory News
    News

    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.

    September 21, 2021 WebPage Regulatory News
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7494