The macro-financial environment has worsened due to uncertainty surrounding trade and economic policy as well as persistent geopolitical tensions. The German economy is faced with structural challenges, and the high valuations in equity and bond markets pose the risk of larger, sudden market price corrections, Bundesbank Executive Board member Michael Theurer said at the presentation of the Financial Stability Review 2025. This year’s Financial Stability Review is the 20th edition of this publication by the German central bank.

According to the Financial Stability Review, risks in German banks’ lending business have been on the rise for some time and could increase further in the context of the cyclical and structural challenges. Theurer also highlighted the potential consequences of high government debt in Europe as well as the risks to financial stability that arise from this, stating: In order for debt to remain sustainable, Europe must achieve persistently stable economic growth. Structural reforms must be accompanied by stringent and credible fiscal rules. As an economically important and creditworthy Member State, Germany bears particular responsibility here as a role model and an anchor of stability for the monetary union.

“All in all, the developments in asset prices and lending are indicative of an upswing in the financial cycle, even though future developments are still uncertain,” the Bundesbank Executive Board member said. According to the Financial Stability Review, some vulnerabilities, such as overvaluations of residential real estate, have diminished. In the German commercial real estate sector, by contrast, the situation remains fragile.

Rising government debt a risk factor

High and still rising government debt ratios pose a risk. Increasing government spending and a growing interest burden are impairing certain countries’ debt sustainability. Given how deeply Germany’s financial system is integrated into the European financial system and in light of the sovereign-bank nexus, this could pose a considerable risk to the stability of the German financial system. While Germany’s debt sustainability is regarded as solid despite the rising debt ratio, other euro area countries are facing greater debt sustainability problems. However, the recently amended national fiscal rules will guarantee neither long-term sustainability nor compliance with EU fiscal rules, which will possibly necessitate fiscal policy adjustments in the medium term, Theurer explained.

Credit risk has increased in the banking sector

The Financial Stability Review reports that the ratio of non-performing loans has risen steadily since the end of 2022. Whilst it was mainly the commercial real estate sector that was affected at first, the report’s authors note that the economic downturn is now spreading to other sectors, albeit to a lesser extent. Banks are furthermore exposed to market risk from investments in government bonds should their prices change abruptly given the high levels of government debt in Europe.

Regulatory capital ratios at German banks are high. However, Theurer also explained that despite the deteriorated risk situation, systemically important banks’ risk weights remain low. To this extent, the regulatory capital ratios could suggest a degree of resilience that is actually lower in some parts of the banking system.

Increased importance of non-bank financial intermediaries (NBFIs) and their interconnectedness poses potential risks

The growing importance of domestic and foreign NBFIs is bringing the associated risks into focus. European funds’ interconnectedness with each other and with the banking sector is especially relevant in this regard.

To be better equipped to assess risks from the NBFI sector and its growing interconnectedness, including with the banking system, it needs to be easier to access pre-existing data across national borders, in particular.

Macroprudential measures appropriate, banking regulation needs to be simplified

Bundesbank Executive Board member Michael Theurer stressed furthermore that the package of macroprudential measures strengthening the resilience of the financial system is appropriate. This package consists of the countercyclical capital buffer as well as the sectoral systemic risk buffer for residential real estate loans. This latter buffer was lowered from 2 % to 1 % in April 2025 after vulnerabilities in the housing market had been partially resolved.

The Basel III reforms introduced in response to the global financial crisis have made the banking system significantly more resilient overall. Banking regulation has become very complex, however. At present, banks have to fulfil capital requirements for a variety of purposes. We support simplifying a range of requirements, Theurer said. The Bundesbank also wants regulatory requirements to be simplified for small, non-complex institutions.