Geopolitical tensions, prolonged uncertainty and structural challenges are keeping risks to financial stability elevated. Despite this, financial market valuations remain high, especially in the US tech sector. The risk of abrupt repricing therefore remains elevated. High government debt in the euro area poses additional risks. Rising funding costs and high expenditures are weighing on debt sustainability and limiting fiscal space available for addressing future crises.
Credit risks at German banks are increasing, but have so far materialised in an orderly manner. Structural challenges in the corporate sector could further increase credit risk at German banks. In the commercial real estate sector, vulnerabilities remain pronounced. Loose lending standards for some new housing loans could leave banks more vulnerable to adverse developments in the residential real estate market. The German banking system is stable, supported by robust capital and liquidity positions. The limited usability of macroprudential buffers at large, systemically important banks can impair the resilience of the banking system.
Risks stemming from non-bank financial intermediaries (NBFIs) increased over the last year. Liquidity conditions in the real estate fund sector are strained. Some funds are already facing liquidity shortages. Insurance companies have high solvency ratios. However, life insurers are facing moderate risks from policy lapses and unrealised losses. The growing interconnectedness between banks, funds and insurance corporations increases the risk that losses and liquidity needs will be transmitted more rapidly across sectors. Private credit is becoming more important as a possible channel of contagion as its interconnectedness with banks, insurance corporations and pension funds increases.
Artificial intelligence (AI) and the digitalisation of the financial system may amplify existing vulnerabilities in the financial system. Cyberattacks, hybrid threats and dependence on a small number of critical third-party service providers pose operational risk. AI can improve financial intermediaries’ cyber defences but can at the same time make cyberattacks faster, more scalable and more sophisticated. The tokenisation of assets can simplify financial transactions but also entails new risks, especially if stablecoins become more widely used.
Policy implications
The resilience of the German financial system should be maintained and strengthened in a targeted manner in light of increased operational risks. Given the challenging environment, heightened uncertainty and existing vulnerabilities, macroprudential capital buffers for banks remain appropriate. German institutions should adequately reflect rising credit risk in their loan loss provisioning. A prudent payout policy will help safeguard the resilience of the banking system. Ongoing European efforts to simplify banking regulation should reduce unnecessary complexity without weakening the resilience of the banking sector. At the same time, financial institutions should strengthen their operational resilience against cyberattacks, hybrid threats and risks associated with the growing use of AI.
The macroprudential toolkit should be refined to better address risks and vulnerabilities. The usability of banks’ macroprudential capital buffers should be improved and a legal basis for income-based instruments for residential real estate financing should be created. For the NBFI sector, the macroprudential perspective should be strengthened, in particular to mitigate liquidity risk at investment funds. Macroprudential surveillance of the NBFI sector should be improved through an efficient European exchange of data.
