Summary of the July Monthly Report

Exchange rates and financial stress

Experience has shown that exchange rates can be fairly volatile in times of heightened tension in the international financial markets. This often sends the currencies of countries with relatively high interest rates on a steep and abrupt downward trajectory. The opposite effect can be observed for low-interest currencies. In the course of the global financial crisis, currencies such as the Swiss franc, the yen or the US dollar experienced at least temporary steep increases in value whilst others such as the Australian dollar, the Canadian dollar and the currencies of many emerging market economies depreciated considerably. When the sovereign debt crisis in the euro area came to a head in the course of 2011, the Swiss franc appreciated so strongly against the euro that it almost reached parity. This even prompted the Swiss National Bank to announce in autumn 2011 that it was prepared to purchase unlimited amounts of foreign currency if need be so as to bring about a minimum exchange rate of 1.20 Swiss francs per euro.

The Bundesbank's latest Monthly Report discusses various explanatory approaches for these significant exchange rate fluctuations in times of crisis. One possible explanation is the unwinding of currency carry trades – ie speculative transactions in which investors seek to take advantage of international interest rate differentials in an effort to generate superior returns. Another explanation which is often voiced in this context is safe haven flows – movements of capital by investors who believe that a particular currency area is a relatively safe place to invest their capital in times of crisis.

As the term "safe haven currency" is not always used consistently, and different currencies are regarded as safe haven currencies in different settings, the current Monthly Report also proposes an empirical approach for identifying safe haven currencies. Based on the empirical findings, the Bundesbank concludes that the Swiss franc and the US dollar can be described as safe haven currencies. Taken in isolation, their rates rise whenever returns in the global equity markets diminish in times of heightened financial stress. The appreciation shown by the yen in times of crisis, meanwhile, appears to be mainly attributable to the unwinding of carry trades. There is no evidence to confirm any further correlation between the rate of change in the yen's exchange rate and the returns generated in the global equity markets.

As for the euro, the results produced by the model do not point to a crisis-specific response. This outcome is consistent with the observation that the euro depreciated only slightly against the currencies of the euro area's most important trading partners, even when the sovereign debt crisis was at its most intense.

Development of the statutory health insurance scheme and the challenges that lie ahead

Approximately 85% of the population in Germany are insured under the statutory health insurance scheme. With expenditure of almost €200 billion, the statutory health insurance scheme is the second largest component of the social security system after the statutory pension insurance scheme. Over the past decade, the statutory health insurance scheme has seen considerably larger expenditure growth than the other large social security sectors despite numerous changes to benefits legislation. The contribution rate has had to be raised significantly because of weaker growth in income subject to contributions. In addition, substantially larger transfers have been made from the central government budget to the statutory health insurance scheme. As both the health insurance institutions and the health insurance fund now hold large reserves, the statutory health insurance scheme appears to be in a comfortable financial situation at present. However, this trend has already gone into reverse. The scheme is already likely to record deficits and deplete its financial reserves this year. If expenditure growth remains strong, contribution rates will have to rise in the future.

The statutory health insurance scheme is highly complex, and there are a number of powerful interest groups at play. Although fundamental reforms have been discussed in recent years, only gradual changes have ultimately come to fruition. There is still scope for increasing efficiency and making the distribution mechanisms more transparent and better targeted. Increasingly shifting the redistribution of income into central, state and local government's tax and transfer system and tying central government grants to specific non-insurance-related payments in a transparent manner could also help to achieve these aims. A greater level of transparency over costs for patients and the therapeutic value of available benefits, as well as a further increase in the contribution of insured persons to costs, could also make the system more cost-effective. Ultimately, it will remain the task of legislators to keep cost pressures in the healthcare system in check. Given demographic changes, it will also be essential to stabilise the scheme's funding base by increasing labour force participation. Raising the statutory retirement age in line with longer life expectancy is a positive step in this respect too, whereas expanding the options for taking early retirement is counterproductive.

Importance of the insurance industry for financial stability

A hallmark of a stable and efficient financial system is its ability to fulfil its key economic functions at all times. Insurers offer enterprises, financial institutions, households and public sector entities protection against financial risks and thus perform a crucial function in the financial system. A breakdown of these crucial functions would have a direct impact on the real economy. At the same time, insurers are highly interconnected with other financial intermediaries. For example, solvency problems in the banking sector can spill over to insurance companies. Yet it is also conceivable that risks emanating from insurers themselves could spread to the rest of the financial system. The July Monthly Report presents empirical analyses conducted by the Bundesbank on the transmission of risks from insurers to the financial system and the real economy.

The prevailing low interest rates are a source of risk for the life insurance sector. German legislators have now passed the Life Insurance Reform Act (Lebensversicherungsreformgesetz), which aims to address these risks. In particular, it amends the legal provisions governing the participation of policyholders in the hidden reserves of fixed-income securities (valuation reserves). Under prior legislation, no allowance was made for hidden losses on the liabilities side of life insurers' balance sheets, which have increased sharply because of the current phase of very low interest rates, in policyholder participation.

The impact of the Life Insurance Reform Act on the solvency of life insurance companies and on financial stability can be assessed in a scenario analysis. In a stress scenario where the low-interest-rate environment takes stronger effect, making allowance for hidden losses in policyholder participation in the valuation reserves reduces the number of insurers which would no longer be able to fulfil the own funds requirements pursuant Solvency I by 2023. In this simulation, and based on its underlying assumptions, the market share of these "at-risk" enterprises, measured in terms of contribution receipts, falls from around 43% to just under 17% by 2023. All in all, the package of measures may help to improve the stability of German life insurers in a prolonged period of low interest rates.

Consolidated financial statement statistics as a contribution to extended corporate financial statement analysis: approach and initial results

For some time now, Germany's non-financial corporate sector, with its broad array of small and medium-sized enterprises (SMEs), has also seen the emergence of groups of various forms in which legally independent enterprises constitute an economic unit in a group setting. Groups operating across national borders represent a strong link connecting domestic and foreign procurement and sales markets, production centres and financial systems, which also makes them a distinct transmission channel for international economic developments.

This presents a broader set of empirical challenges at both the aggregate and macroprudential level which go beyond the bounds of the traditional corporate financial statement statistics based on legally independent units operating within a national economy. The Bundesbank's new consolidated financial statement statistics help to address this issue by delivering quarterly data on the asset and capital structure as well as the profitability of non-financial groups operating in Germany. The time series date back to 2005 and are based on the consolidated financial statements prepared by currently around 260 non-financial corporations listed in the Prime Standard segment of the Frankfurt Stock Exchange.

Consolidated financial statement statistics compute data and ratios derived from both the balance sheets and profit and loss accounts of large German groups, including their globally active subsidiaries. Unlike the separate financial statements which individual enterprises draw up in line with the German Commercial Code (HGB), and which are inputs in the corporate financial statement statistics, the consolidated financial statements of listed groups are prepared pursuant to International Financial Reporting Standards (IFRS) and are adjusted for intra-group transactions, capital ties and debt relationships.

There are fundamental structural differences between the consolidated financial statement statistics and the extrapolated separate financial statements. In balance sheet terms, both non-current assets and non-current liabilities play a significantly greater role in the consolidated financial statement statistics than they do in separate financial statements. Intangible assets, notably good will, is another major item. Balance sheet ratios have a relatively stable profile over time, with the capital ratio averaging an impressive 30%.

German groups' revenues and profitability figures show just how deeply they are embedded in the global economy. This means that their profits are more susceptible to global shocks, as the sharp contraction in earnings during the financial and economic crisis in late 2008 and in 2009 demonstrated. German groups quickly bounced back from this trough to return to strong profitability. Revenues have more or less moved sideways since 2012, with both the impact of the euro-area debt crisis on the real economy and the slower pace of global economic activity overall likely to have been contributing factors.