Bundesbank sees increasing risks for German banks

Risks for German banks from the eurozone debt crisis are increasing, but recent efforts to strengthen capital resources meant those risks were still manageable, the Bundesbank said Thursday.

Bundesbank sees increasing risks for German banks
Photo: DPA

“The risks to the German financial system grew perceptibly as the sovereign debt crisis worsened and widened over the summer of 2011,” the central bank wrote in its annual Financial Stability Review.

As the environment deteriorated, “the German banking system, too, faces new burdens,” the Bundesbank said. German banks would probably have to make additional writedowns on Greek government bonds, for example.

Moreover, their earnings prospects were gradually being squeezed by recent market developments and the muted economic outlook. “However, the German banking system at least enters this period of major uncertainty with improved resilience,” the report said.

“Capital levels have risen appreciably in recent years, earnings have been very stable to date, and funding vulnerabilities have been reduced.”

Executive board member Andreas Dombret, presenting the report, said that “overall, the Bundesbank believes that risks arising from exposures to Greece, Ireland and Portugal are manageable.” By contrast, the volume of exposure to borrowers in the large euro-area countries Italy and Spain was greater.

Nevertheless, the overall assessment of the German financial system was positive, the Bundesbank said.

The quantity and quality of German banks’ capital had improved. Between the spring of 2008 and the summer of 2011, the core Tier-1 ratio of 13 major German banks had increased from 8.1 percent to 13.1 percent. And the banks’ earnings had remained stable for some time now.

“But the many positive developments in the German banking system should not blind us to the fact that the outlook has deteriorated,” said Bundesbank vice president Sabine Lautenschläger.

“New burdens as a result of the direct and indirect consequences of the sovereign debt crisis such as haircuts on euro-area bonds and plummeting prices for many assets are weighing on financial institutions’ earnings,” she said.

The Bundesbank therefore welcomed EU plans to recapitalise large banks in a bid to counter the loss of confidence in the European banking sector, Dombret said.

The Financial Stability Review insisted that for markets to function properly, market participants had to be made responsible.

“That also means that systemically important financial institutions must be able to exit the market without the financial system collapsing,” Dombret said.


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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.