Financial Stability Committee presents first annual report

The Financial Stability Committee (Ausschuss für Finanzstabilität), which was set up last year, presented its first report on financial stability in Germany to the Bundestag on 16 June 2014.

The Financial Stability Committee's report describes the situation regarding and developments in financial stability, as well as providing information on the Committee’s activities in the period from its establishment in January 2013 to March 2014. In its report, the Committee concluded that the situation regarding financial stability in Germany had eased during the period under review. Nevertheless, various risks still remain. For example, claims against debtors in the countries worst affected by the European sovereign debt crisis and claims against economically weakened sectors are both still a source of vulnerabilities. Additional challenges could also arise from structural changes in the financial system, eg the increasing importance of shadow banks, while the persistent low-interest-rate environment is also affecting the stability of the German financial system.

Generally speaking, low interest rates and accommodative financial conditions can create a breeding ground for risks to financial stability. In this context, the Committee analysed developments in the residential real estate sector particularly closely. No self-perpetuating spiral of unsustainable price increases, rising debt levels and easing of lending conditions was detected by the Committee during the period under review. Nonetheless, the Committee will continue to closely monitor developments on the residential property market.

In the banking system, the low-interest-rate environment is aggravating the structural weakness in earnings being experienced by many credit institutions. Life insurance companies are seeing their earnings come under pressure as a result of the protracted phase of low interest rates in conjunction with the minimum return typically guaranteed in their policies. The Federal Government reported on the objectives of its reform package for the life-insurance sector.

The activities of shadow banks could also generate risks to financial stability. Due to the regulatory framework in place, the shadow banking system in Germany is relatively small by international standards. However, the possible effects of activities carried out by foreign shadow banks should be monitored carefully.

Ultimately, the Committee’s work involves evaluating macroprudential instruments and providing guidance on their implementation so that the relevant bodies are able to take action to combat adverse developments should the need arise. This work will likewise be continued in 2014.

Background information on the Financial Stability Committee

The Financial Stability Committee is the central body for macroprudential oversight in Germany. The financial crisis exposed the need to reinforce macroprudential oversight that is designed to safeguard the stability of the financial system as a whole. In addition, macroprudential oversight and microprudential (institution-specific) supervision needed to be better integrated with one another. The Committee was set up to address these concerns and will henceforth report to the Bundestag on its activities on an annual basis.