Bundesbank sees increasing risks for German banks

10th November 2011, Comments 0 comments

Risks for German banks from the eurozone debt crisis are increasing, but recent efforts to strengthen capital resources meant those risks were still manageable, the Bundesbank said Thursday.

"The risks to the German financial system grew perceptibly as the sovereign debt crisis worsened and widened over the summer of 2011," the central bank wrote in its annual Financial Stability Review.

As the environment deteriorated, "the German banking system, too, faces new burdens," the Bundesbank said.

German banks would probably have to make additional writedowns on Greek government bonds, for example.

Moreover, their earnings prospects were gradually being squeezed by recent market developments and the muted economic outlook.

"However, the German banking system at least enters this period of major uncertainty with improved resilience," the report said.

"Capital levels have risen appreciably in recent years, earnings have been very stable to date, and funding vulnerabilities have been reduced."

Executive board member Andreas Dombret, presenting the report, said that "overall, the Bundesbank believes that risks arising from exposures to Greece, Ireland and Portugal are manageable."

By contrast, the volume of exposure to borrowers in the large euro-area countries Italy and Spain was greater.

Nevertheless, the overall assessment of the German financial system was positive, the Bundesbank said.

The quantity and quality of German banks' capital had improved. Between the spring of 2008 and the summer of 2011, the core Tier-1 ratio of 13 major German banks had increased from 8.1 percent to 13.1 percent. And the banks' earnings had remained stable for some time now.

"But the many positive developments in the German banking system should not blind us to the fact that the outlook has deteriorated," said Bundesbank vice president Sabine Lautenschlaeger.

"New burdens as a result of the direct and indirect consequences of the sovereign debt crisis such as haircuts on euro-area bonds and plummeting prices for many assets are weighing on financial institutions' earnings," she said.

The Bundesbank therefore welcomed EU plans to recapitalise large banks in a bid to counter the loss of confidence in the European banking sector, Dombret said.

The Financial Stability Review insisted that for markets to function properly, market participants had to be made responsible.

"That also means that systemically important financial institutions must be able to exit the market without the financial system collapsing," Dombret said.

© 2011 AFP

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