Trade policy conflicts and persistent geopolitical tensions increased the risks to financial stability in the past year. Structural challenges are weighing on the German economy and could affect financial stability going forward. Despite these developments, valuation levels in equity and bond markets are significantly elevated. This has increased the risk of abrupt market price corrections. Additional risks to financial stability in Germany arise from high and rising government debt ratios in some euro area countries. 

Risks from German banks’ lending business are on the rise against a backdrop of cyclical and structural challenges. Risks in the commercial real estate sector contrast with fairly moderate vulnerabilities in the housing sector. Banks’ capitalisation is sound overall. But it would be a mistake to overestimate the resilience of large banks in particular because of low risk weights.

The growing importance of non-bank financial intermediaries (NBFIs) and their interconnectedness with both their peers and the banking system is a challenge to the macroprudential oversight of the financial system. In addition, novel risks resulting from financial innovations like stablecoins, and advances in digitalisation driven notably by artificial intelligence (AI), need to be monitored closely.

The package of macroprudential measures is appropriate in light of the challenging macro-financial environment, mounting risks, and lingering vulnerabilities in the banking sector.

To tackle the increasing complexity of banking regulation, the regulatory regime will have to be simplified, but the resilience of the financial system has to be preserved at the same time. To advance this initiative, the Bundesbank has introduced proposals on a small banking regime and on simplifying microprudential and macroprudential capital requirements into national and European discussions.

To be better equipped to assess risks from the NBFI sector and its growing interconnectedness, including with the banking system, it will be necessary to do more to share previously collected data at the international level.