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"Vulnerable" – The Bundesbank warns of risks

Ahead of an expected recession, the Bundesbank warns of growing financial risks. Financial institutions should build up additional reserves.

The Bundesbank calls on financial institutions to take greater precautions in view of the growing risks to financial stability. “Banks should be able to absorb losses on their own,” Bundesbank Vice President Claudia Buch said at the presentation of the Financial Stability Report 2022 on Thursday

Frankfurt. Otherwise there could be a credit crunch which would exacerbate a crisis in the real economy.

Overall, the Bundesbank sees a significantly worsened environment: Economists are predicting a recession for 2023. Extremely high inflation has been causing problems for consumers and businesses for months. Increases the likelihood that borrowers will be unable to repay loans. “Real economic risks have increased significantly,” Buch summarized.

The financial system remains vulnerable to these risks. “That means we really need to make sure that vulnerabilities that we’ve already seen don’t become wounds that are then very difficult to heal later,” Buch said.

The Bundesbank vice president warned that the time series that financial institutions use to estimate future credit risks could prove overly optimistic: “If we see here that loan loss provisions have fallen very sharply, that shouldn’t give the green light for future risks.”

Joachim Wuermeling, Bundesbank board member responsible for banking supervision, confirmed: “Credit risks and loan defaults will be a constant companion in 2023. And that is why we are issuing appropriate warnings.” Financial institutions should use the space for additional provisions, Wuermeling warned: “What surprises us is that so few provisions are made for additional risks.”

The recently sharply increased interest rates are good for the sector in the medium term after years of negative interest rates. In the short term, however, there are also risks because higher interest rates place an additional burden on borrowers. Higher interest rates would also have depressed bond prices, banks would have had to make write-downs and would have already largely depleted their hidden reserves, Buch explained.

The Bundesbank calls on financial institutions to exercise restraint in dividend payments. Wuermeling stressed: “In view of the high level of uncertainty, it is necessary to make prudent provisions for risks and only carefully distribute profits.” It’s important to keep as much capital in the system as possible for possible losses, Wuermeling said.

Ahead of an expected recession, the Bundesbank warns of growing financial risks. Financial institutions should build up additional reserves.

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