Germany's banks are under stress. Most financial institutions would survive the scenario simulated in a stress test. However, the scenario did not take inflation and war into account, nor did the turnaround in interest rates.
According to the supervisory authority, banks and savings banks in Germany are going solidly into a difficult year 2023 overall. But concerns are growing in the face of a mixture of economic downturn, persistently high inflation and the corona pandemic that is not yet over. "We all don't know how windy it really gets. But the conditions for a perfect storm are there," said Raimund Röseler, chief bank supervisor at the Bafin financial supervisory authority.
In a stress test, the Federal Financial Supervisory Authority (Bafin) and the Deutsche Bundesbank scrutinized the approximately 1,300 small and medium-sized financial institutions that they directly supervise. In a survey, the institutes had to answer how their plans and forecasts would react to five interest rate scenarios for the period 2022 to 2026. In the stress test, the financial institutions simulated their earnings situation for the years 2022 to 2024 in a base and a stress scenario. The latter simulated a severe economic downturn with a 4.7 percent decline in economic output over the three years.
"The banking system is showing satisfactory resilience," said Bundesbank board member Joachim Wuermeling. On average, the assumed stress scenario reduced the core Tier 1 capital ratio as a buffer for times of crisis by 3.2 percentage points to 14.5 percent. "If the banks can withstand this extreme stress test scenario, as the stress test was based on, then they are - as of today - also prepared for what we expect in the coming months," said Wuermeling.
However, Wuermeling warned: "The banks should not sit back." The current stressful situation is not the same as the one asked. The test did not take into account the turnaround in interest rates, inflation and the effects of the war in Ukraine. Nevertheless, the findings are relevant because the simulated stress scenario now comes close to reality, the supervisors explained. The supervisors are already worried about some banks, as Bafin supervisor Röseler explained: "We are currently assuming that a medium double-digit number of banks would not survive the stress scenario without additional capital injections."
In the future, increasing loan defaults could become a problem for individual houses. "We're already worried about the value of loans for next year," said Rösler. "We will certainly delight one or the other bank with an examination of the loan portfolios." The Bundesbank and Bafin currently see no signs that there could be a credit crunch in Germany because financial institutions are restricting their offerings due to a shortage of capital.
Originally, the Bundesbank and Bafin wanted to carry out the fifth exercise of this type last year. However, the supervisors postponed the stress test so as not to put additional strain on the banks in the corona pandemic. According to the information, the institutions now examined comprise around 91 percent of all credit institutions in Germany and account for around 45 percent of the combined balance sheet totals. The larger institutes are directly supervised by the European Central Bank (ECB), and such stress tests are also regularly carried out for them.
