Bundesbank Says Low Interest Rates Encouraging Risk Build-Upby and
German central bank publishes Financial Stability Review
Report comes as Germany issues ultimatum on Basel III rules
Persistently low interest rates are encouraging the build-up of risks that could threaten financial stability, Germany’s Bundesbank said.
While cheap borrowing costs are necessary in the current environment of subdued economic growth, banks and life insurers would likely suffer most if rates were to rise suddenly, the central bank said in its Financial Stability Review published Wednesday. It warned that a future rise in interest rates could affect multiple financial institutions simultaneously and take on a systemic dimension.
“At this moment, if we look at the financial markets, we see a danger of market participants holding false certainties -- and thus, expecting interest rates to stay low and asset prices to stay high over the long term, taking excessive risks,” Bundesbank Vice President Claudia Buch said in a speech in Frankfurt. “Financial stability considerations therefore warrant the build-up of risk buffers so that losses from unforeseen events can also be cushioned.”
The European Central Bank’s prolonged low interest-rate policy has raised concern in Germany about the profitability of its banks. While the Bundesbank said there can be no doubts about the liquidity and solvency of German lenders, the report highlighted the risks financial institutions could face if macroeconomic settings were to suddenly change.
Banks are offering loans with longer maturities, making them less flexible in responding to rate changes, according to the review. The Bundesbank said institutions should ensure they have adequate capital and actively hedge the risks in their contracts with customers to ensure abrupt price and rate changes don’t hinder their ability to serve the real economy.
The review comes a day after the Bundesbank issued an ultimatum to other major banking powers, including the U.S., that it will walk away from talks on revamping global capital rules unless its key demands are met.
Board member Andreas Dombret said on Tuesday that Germany won’t accept a deal “at any price” at talks in Santiago this month. He laid out a series of demands for the Basel Committee on Banking Supervision, the international standard-setter.
Committee members, including the U.S. Federal Reserve and Japan’s Financial Services Agency, are racing to meet a year-end deadline to put the final touches on the international capital standards known as Basel III. With the administration of President-elect Donald Trump soon to take power in the U.S., propelled into office in part by increasing suspicion of globalization and regulation, Dombret said he hopes work in the committee “will continue to be based on mutual trust.”
At the publication of the Financial Stability Review, he reiterated his stance but added that he will travel to Santiago with the intention of reaching a deal.
“I’m not interested in postponing, as some others have suggested; I’m interested in closing a transaction,”’ he said in a Bloomberg Television interview. “But this has to be a sensible transaction -- we’re not there yet.”
Dombret also said the Bundesbank will conduct a survey next year among the German lenders it supervises directly. As in 2013 and 2015, it will look at the low-rate environment, though it will add stress tests based on rate, credit and market risks.
“Profitability is exceedingly weak among German credit institutions, and the persistent low-interest-rate environment is only making matters worse,” he said. “Credit institutions whose business models are heavily geared to net interest income, in particular, might encounter serious medium to long-term problems if the phase of rock-bottom interest rates persists.”
He addressed the planned acquisition of London Stock Exchange Group Plc by Deutsche Boerse AG, saying it could play a role in the aftermath of Britain’s decision to leave the European Union.
The merged entity “could serve as a bridge between the U.K. and EU financial markets and ensure continuity, such as in the clearing of euro-denominated financial instruments,” he said. “We must make sure that the door is open for close cooperation with the U.K. authorities.”
The Bundesbank also noted a “sharp” rise in German property prices since 2010 and said low rates create a stability risk by providing an incentive to invest in residential property. Even so, it sees no sign of excessive lending or a weakening of lending standards.