# Key messages

*Non-final working translation*{#par-a39i4o}

Risk situation
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**Geopolitical tensions, prolonged uncertainty** and **structural challenges** are keeping risks to financial stability elevated. Despite this, **financial market valuations remain high** , especially in the 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. {#par-i497ue}

**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. {#par-a45uo1}

**Risks stemming from non-bank financial intermediaries** () 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. {#par-e89877}

**Artificial intelligence** () 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** . 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. {#par-ieu174}

Policy implications
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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 .{#par-e5o26a}

**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 sector, the macroprudential perspective should be strengthened, in particular to **mitigate liquidity risk at investment funds** . Macroprudential surveillance of the sector should be improved through an **efficient European exchange of data**.

*[**AI**]: artificial intelligence
*[NBFI]: non-bank financial intermediaries
*[NBFIs]: non-bank financial intermediaries
*[AI]: artificial intelligence
*[US]: United States