Bundesbank President Joachim Nagel believes that a further rise in interest rates will be necessary. Speaking in a video message at the Bundesbank symposium “Banking supervision in dialogue”, he went on to remark that, be that as it may, how high they still need to go was impossible to say at this point in time. Nor can we say how long they will remain high or where they will go after that, he said, adding that it all depended on how inflation developed, which he saw as being highly uncertain. Given this uncertainty, we are not currently providing a precise “interest rate outlook” or forward guidance in our monetary policy communication.

In Mr Nagel’s view, this high level of uncertainty applies to both the short and the long term. He explained that in the short run, for example, wages could rise unexpectedly sharply. That would prolong the wave of inflation via second-round effects. Second-round effects are the ways in which prices, wages or inflation expectations respond to already higher prices or costs. 

According to the Bundesbank President, the high prices for energy, commodities and other intermediate products could also be passed through to end customers to a greater degree than current projections suggest. In addition, he said, there were a number of developments that could push up inflation in the long term. He described how, for example, a geopolitical transformation that is probably without precedent in this century was currently unfolding, with the Russian war of aggression being a significant factor in this and there also being other geopolitical tensions and, overall, a risk of fragmentation. Furthermore, Mr Nagel remarked, climate change and the decarbonisation of the economy necessary to protect the climate would require far-reaching adjustments. 

Buch: Banks and supervisors need to take a more granular view

© Nils Thies

The impact of structural change – comprising the trends of digitalisation, demographics, decarbonisation and deglobalisation – on banks in Germany was the key theme of the speech held by Bundesbank Vice-President Claudia Buch, who took the podium after the President. Banks have an important role to play in financing change and, at the same time, need to display sound management of the associated risks, Ms Buch explained. On the Executive Board of the Bundesbank, her areas of responsibility include financial stability as well as banking and financial supervision. According to Ms Buch, extensive economic policy measures were one reason why the correlation between economic developments and credit risk had loosened. In addition, banks’ risk models had not been not “trained” to provide information on future risks in a scenario of higher interest rates, sectoral adjustments and high macroeconomic uncertainty. She concluded that banks would therefore be well advised to calculate future credit risk based on the most adverse scenarios possible and use any discretion they have to ensure that less meaningful data from the past do not distort the models’ results. 

Another aggravating factor, in Ms Buch’s view, was that structurally necessary adjustments do not simply become apparent at the level of a shift between sectors. How well enterprises within the same sector cope with the new framework would vary, she said. In order to assess the risks posed by the transformation, banks and supervisors therefore needed to take a more granular view. She cited the impact of climate risks as an example, explaining that a loan to a glass manufacturer entailed different climate risks depending on whether the glass is melted using electricity from renewable sources or using gas. Standardised disclosure requirements are therefore important to ensure that credit risk can be robustly assessed and appropriate risk provisions can be made, Ms Buch noted. Furthermore, she advised banks to have methods and processes in place to identify sustainability risks and to be able to incorporate them into risk management, saying that around two-thirds of the institutions were only just starting to implement supervisory recommendations on sustainability risks. 

The Vice-President rounded off her remarks with a call for a broad public discourse on the role of banks in the transformation and how to deal with risks. The answers to the questions about how to deal with new technologies and new risks cannot be provided by supervisors alone,” she said, adding that supervisors act on behalf of society – and politicians consequently stake out the framework in which they operate. 

Key event on banking and supervisory topics

© Nils Thies

At the symposium, Mark Branson, President of the Federal Financial Supervisory Authority (BaFin), likewise stressed the need for robust institutions that can play their economic role in the long term. To do this, they would have to be able to manage their environmental risks. In addition, Mr Branson warned of products and services being labelled as sustainable when in reality they were not: greenwashing destroys trust. This was one of the greatest risks of transformation financing, he said. Experts define greenwashing as the misleading marketing of technologies as environmentally friendly or sustainable. 

For many years now, the Bundesbank symposium has been one of the key events on banking and supervisory topics in Germany and is a forum for dialogue between representatives from the fields of supervision, banking and research. This year, too, the focus was on highly topical supervisory issues. Other panel discussions and talks focused on the impact of the interest rate reversal on the banking industry, climate risks and the results of the climate stress test.