The German financial system is resilient, but operating in an environment of geopolitical tension. Increased risks arise from high valuations in the financial markets, rising credit risk, real estate financing vulnerabilities, high government debt and the growing importance of private credit. In addition, artificial intelligence and hybrid threats increase the risk of cyber attacks on critical financial services. The times are challenging and look set to remain so, said Michael Theurer, Member of the Executive Board of the Deutsche Bundesbank, at the unveiling of the Financial Stability Review 2026. We therefore need sufficient resilience, capital buffers that can actually be used in practice, reliable data and a macroprudential framework that keeps pace with developments – including the risks of an increasingly digitalised financial world.

High valuations on the financial markets as risk factors

Financial market valuations remain ambitious, especially in the US tech sector. Equity and corporate bonds are valued highly, while risk premia remain low. These high valuations make the markets particularly vulnerable to negative surprises. If high earnings expectations are not met or if geopolitical tensions were to intensify, prices could fall significantly. Such revisions can spill over to other market segments and worsen financing conditions for firms. The potential for setbacks is considerable, Theurer stressed.

Rising government debt and limited fiscal leeway

In many countries, high and rising debt levels are meeting weak growth, higher funding costs and structurally expanding government expenditure due to factors such as demographic change and rising defence expenditure. This weighs on debt sustainability and limits fiscal leeway. Banks in Europe continue to face risks from high exposures to sovereign debt on their balance sheets. Effective rules are therefore needed to make banks diversify their sovereign exposures – through capital surcharges for high exposures to individual sovereigns or through concentration limits, Theurer explained, going on to state that the mixture of high and rising government debt and low economic growth remained toxic.

German banks’ credit risk increasing

Pressure on the corporate sector is rising. Weak profitability, higher financing costs and more insolvencies could lead to further credit defaults. The share of non-performing loans has risen since the middle of last year.

Income in the German banking sector remains high owing to strong net interest income, and institutions’ capital and liquidity positions are sound. However, if the macro-financial environment deteriorates significantly, the sector could come under pressure. For systemically important banks, low risk weights and capital buffers whose use is limited can lead to worse absorption of losses. Theurer emphasised that capital buffers need to actually be usable in a stress event. A buffer that cannot be fully used by banks in a stress event only performs its stabilising function to a limited extent. It is therefore important to simplify the regulatory framework and increase the effectiveness of the buffers.

Vulnerabilities in residential and commercial real estate

In the German housing market, the vulnerabilities created during the low interest rate period have declined while nevertheless remaining relevant. In addition, data on new residential real estate lending indicate other vulnerabilities. In the second quarter of 2026, almost 40 % of new loan volume was attributable to loans with a loan-to-value ratio of more than 90 % of the real estate value. For almost 11 % of the new lending volume, the loan amount actually exceeded the value of the property being financed. Households remain robust overall, said Theurer. However, high loan-to-value ratios increase the potential losses in the event of a credit default. In addition, a large proportion of new residential real estate loans see borrowers spending a large share of their income on ongoing debt servicing.

In the commercial real estate sector, risks remain elevated. Non-performing loans have continued to rise, albeit to a lesser extent than before. Transaction volumes in the commercial real estate market are currently low and there is still a risk of a fall in prices. This is due to potential interest rate hikes and potential pressure to sell from the real estate fund sector. The market situation therefore remains tense.

Risks at non-bank financial intermediaries increased

Risks have increased, especially for funds. Since mid-2023, German open-end real estate funds have seen increasing outflows. Individual funds had to suspend the redemption of units or introduce redemption restrictions. Fire sales could further weigh on the commercial real estate market.

Funds are becoming increasingly interconnected with each other and with banks, insurance corporations and pension funds. This allows losses and liquidity bottlenecks to spread more quickly between sectors. In addition, international private credit funds have become more important, their interconnectedness with the financial system has increased and the segment is not transparent overall. 

For non-bank financial intermediaries, especially for funds, we need a better data exchange in Europe, stronger reporting in less transparent segments such as private credit, and a flexible toolkit to limit systemic liquidity risks surrounding investment funds at an early stage, said Theurer. 

Maintaining resilience

All in all, banks, insurance corporations and funds coped well with their burdens. Against the backdrop of rising credit risk, institutions’ risk provisioning is of major importance. The countercyclical capital buffer and the sectoral systemic risk buffer for loans secured by residential real estate strengthen the banking system’s ability to absorb losses. The existing macroprudential capital buffer requirements remain appropriate in view of the challenging environment. The resilience of the banking system needs to be maintained, said Bundesbank Executive Board member Theurer. Non-bank financial intermediaries need to strengthen resilience and limit systemic risks.