The macro-financial environment has deteriorated substantially over the course of 2022. It has been shaped by subdued growth prospects, high inflation as well as rising interest rates and risk premia. Banks, insurers and investment funds have already recorded losses as a result of market corrections. The sharply higher and extremely volatile stock market prices for energy products have sharply increased the collateral requirements of central counterparties in derivatives trading. That said, government measures have been able to cushion liquidity shortages at enterprises in the energy sector. Overall, however, the supply of credit to the economy has worked well to date.

Major downside risks remain which require sufficient resilience. A worsening energy crisis, a sharp economic slump and abruptly rising market interest rates could put the German financial system under considerable pressure. Rising costs are limiting the financial leeway of households and enterprises. Future credit risks are increasing as a result. “To ensure that potential stress is not amplified via the financial system, financial institutions must be sufficiently resilient on their own,” said Claudia Buch, Vice-President of the Deutsche Bundesbank, at the presentation of the 2022 Financial Stability Review. 

German financial system vulnerable to adverse developments 

Vulnerabilities in the stock of loans have built up in the German financial system over a period of several years. Low interest rates as well as strong growth in loans and asset prices have contributed to this. Insolvencies in the corporate sector and thus credit risk have declined in recent years. Banks still consider their credit risk to be fairly low. However, many of the assumptions made in the past when granting loans are likely to prove to be overly optimistic. 

Macroeconomic risks require sufficient resilience of the financial system

The report highlights the need for sufficient resilience in the financial system in view of the existing macrofinancial risks. Not only supervisors but also financial market actors have a part to play. “Financial institutions should assess the impact of adverse scenarios. Given the high uncertainty, they should engage in prudent risk provisioning and exercise caution when distributing profits,” emphasised Joachim Wuermeling, the Bundesbank Executive Board member responsible for banking supervision. The Federal Financial Supervisory Authority (BaFin) announced a package of macroprudential measures aimed at strengthening the resilience of the financial system at the beginning of 2022. The countercyclical capital buffer was raised and a sectoral systemic risk buffer was introduced. If necessary, BaFin can release the macroprudential buffers, but at the current juncture there is no need to do so. “Macroprudential policy is not economic policy,” noted Vice-President Buch. A release would be appropriate, in particular, if substantial losses occur in the financial system or if they are clearly indicated and there is therefore a risk that the banking system will excessively restrict lending. Sufficient resilience is also important given the pressure for structural change in the German economy, which has intensified as a result of geopolitical factors and the climate crisis.

The Review includes two special chapters. One chapter describes the stabilising role of central clearing in derivatives trading. The second examines the relevance of commercial real estate to the financial system, also in light of commercial real estate’s global interconnectedness.