The Bundesbank said risks to financial stability haven’t receded even after the European Central Bank’s bond-purchase plan calmed financial markets.
“The risks to the German financial system are no lower in 2012 than they were in 2011,” Germany’s central bank said in its Financial Stability Review released in Frankfurt today. “The European sovereign debt crisis remains the greatest threat to financial stability in Germany.”
With at least five euro-area members in recession and rising debt yields in countries like Spain and Italy threatening the common currency, the ECB in August announced its unlimited bond-buying program to ease market turmoil. Bundesbank President Jens Weidmann opposed the plan, saying it is tantamount to financing governments.
“Monetary policy cannot eliminate the causes of the crisis; it can only buy time,” Sabine Lautenschlaeger, deputy president of the Bundesbank, said in a press release today. “Central banks had already done a lot to that end.”
There’s a risk that the ECB’s short-term crisis-fighting measures will overburden its medium-term oriented monetary policy, the Bundesbank said in the report.
Still, “there is good news regarding German banks,” the Bundesbank said. “In response to the sovereign debt crisis, the group of 12 major German banks with an international focus significantly reduced their exposure to borrowers in Greece, Spain, Portugal and Italy between mid-2010 and mid-2012.”
This has “reduced the threat of cross-border contagion” and made the German banking system “much more resilient than before,” the Bundesbank said.
“Tier-1 capital ratios have increased distinctly,” it said. “Between March 2008 and September 2012, the tier-1 capital ratio of the group of 12 major German banks with an international focus rose from 8.3 percent to 13.6 percent of their risk-weighted assets.”
At the same time, a worsening of the situation in Europe “would have a significant adverse impact on German banks and insurers,” the Bundesbank said. “In addition, low interest rates, high liquidity and potential exaggerations in the German real-estate market could pose a future threat to financial stability.”