Germany’s small and medium-sized banks and savings banks remain highly resilient. Despite a tense economic situation, heightened geopolitical risks and rising burdens, especially in corporate and commercial real estate business, institutions have, on the whole, a sound capital base which is sufficient to cope with severe crises. Bafin Executive Director Nikolas Speer and Bundesbank Executive Board member Michael Theurer today announced this fundamental outcome of the stress test for less significant institutions (LSIs).

In parallel to the LSI stress test, the German financial supervisor Bafin and the Deutsche Bundesbank conducted a survey of institutions. 1,113 banks and savings banks – and thus around 90 % of all credit institutions in Germany, representing some 38 % of aggregate total assets – took part.

Institutions remain on a sound footing overall. Due to their good capital base, most banks and savings banks would also be able to withstand a severe global economic slump, said Nikolas Speer, Chief Executive Director of Banking Supervision at Bafin, at the press conference in Frankfurt am Main where the results of the stress test were presented. The pre-determined scenario in the stress test corresponds to a very severe crisis resulting from a simulated escalation of geopolitical tensions. In such a stressed scenario, German LSIs’ aggregate common equity tier 1 (CET1) ratio would decline by around 3.8 percentage points to 14.6 %, mainly due to provisions for counterparty credit risk and market risk.

In this scenario, individual banks and savings banks increasingly come under pressure. Several dozen institutions are in danger of no longer meeting their prudential capital requirements. However, even though the scenario was similarly severe to that of the 2024 LSI stress test, fewer institutions would have been affected. One reason for this is that institutions whose capital base was flagged two years ago were subsequently supervised closely. Most of those banks and savings banks have since increased their own funds ratios, thereby strengthening their resilience to crises. “We are taking particular note of the institutions that were flagged by the stress test. Should it be necessary, we will take timely supervisory measures, Mr Speer stressed.

According to findings from the survey on current and future profitability and risk, institutions remain optimistic about their earnings opportunities despite the geopolitical and economic challenges. On the whole, institutions expect the return on assets to go up from 0.43 % in 2025 to 0.64 % in 2028, which corresponds to an increase by just under one-half,” said Michael Theurer, the Executive Board member responsible for financial supervision at the Deutsche Bundesbank. As in the previous LSI stress test, institutions expect their risk-weighted assets to grow more strongly than their total assets. This could be an indication of stronger risk-taking, but also a result of regulatory changes. At the same time, banks and savings banks across the board are planning a further increase in the CET1 capital ratio from 18.4 % at present to 19.1 % in 2028. On the other hand, one institution in five expects the CET1 capital ratio to decline over the next three years. 

The economic recovery remains sluggish and geopolitical risks are still high. In addition, structural burdens, especially in corporate and commercial real estate business, can further impair borrowers’ debt sustainability. The current developments over recent months have not yet been fully factored into the budgeted figures collected in the second quarter. This aspect was highlighted by Mr Theurer, who said: The persistently high level of uncertainty surrounding future geopolitical developments makes the economic outlook more difficult. It is thus all the more necessary for credit institutions to conduct their business and capital planning in a prudent manner in order to maintain a sound capital base and ensure the financing of the real economy, even in the event of unforeseen shocks.” He added that Bafin and the Bundesbank were rigorously reviewing these aspects as part of their off-site supervisory activity. According to Mr Theurer, the data collected in the stress test and survey provide valuable insights into this. Particularly vulnerable institutions were subjected to even more intensive supervision early on, he noted. This has helped to further strengthen the stability of the German banking market, in his view.

In the 2026 LSI stress test, institutions benefited from significant methodological simplifications, leaner data collection and a stronger risk orientation. Going forward, only those institutions whose capital ratios fall below the total SREP capital requirement in the adverse scenario of the stress tests plus a buffer of 500 basis points will receive a recommendation for additional own funds (“Pillar 2 guidance”). Supervisors regard the undershooting of this limit as a risk-oriented early warning threshold. This means that around 40 % fewer institutions will receive an own funds recommendation in future.