Financial Stability Review 2011
European sovereign debt crisis greatest risk to financial system
The Bundesbank’s annual Financial Stability Review was presented to the media on 10 November 2011. It identifies the European sovereign debt crisis as the greatest current risk to the German financial system. Besides Greece, Ireland and Portugal, serious doubts are now beginning to arise as to whether Italy and Spain, too, will be able to service and repay their high levels of government debt.
It follows that overcoming the crisis requires tackling unsustainable public finances in several euro-area countries. Financial assistance is no substitute for such corrections. The objective must be to work towards permanently sound fiscal policies in the euro-area countries through closer supervision, stronger institutions and deeper economic union. The strict separation between monetary and fiscal policy must be respected.
According to the Financial Stability Review, the European banking sector is confronted by a considerable loss of confidence as a result of the sovereign debt crisis. Countering this loss of confidence is possibly the greatest challenge facing the financial industry. The Deutsche Bundesbank therefore welcomes the recapitalisation of the major banks that has been initiated at the European level. Nonetheless, improved resilience has enhanced the German banking system’s robustness in the past two years. Capital levels have risen appreciably, profitability has been fairly stable to date, and vulnerabilities in refinancing have been reduced.
Challenges are now emerging, however. These include haircuts on some claims against the Greek state, higher funding costs and the deterioration of the economic outlook. Moreover, the Bundesbank sees ongoing risks in persistently low interest rates and high global liquidity. Moreover, legacy problems at banks as a result of credit claims on commercial real estate and structured securities have not yet been fully dealt with.
To secure financial stability long term, the institutional and regulatory framework needs developing. Large financial institutions, too, must be able to exit the market without jeopardising the financial system.