Summary of the March Monthly Report

German balance of payments in 2012

Amid a challenging external environment, Germany’s current account surplus grew significantly in 2012 to 7% of gross domestic product (GDP), which was only slightly below the previous highest surplus re-corded in 2007.

On the export side, this rise was attributable to the German economy’s ability to hold its own on markets outside Europe despite the significant slowdown in the pace of growth. This was generally due to the attractive product range offered by German exporters, although the euro’s lower external value also played a role. Germany’s strong export performance vis-à-vis non-euro-area countries greatly outstripped the trade losses suffered by its enterprises with customers in the euro area. The import side, too, contributed considerably to bolstering the current account surplus. In particular, the uncertainties fostered by the crisis in the euro area caused German firms to lower or postpone new investments, many of which entail a significant import component.

While noticeable progress has been made in terms of correcting the current account imbalances within the euro area, the 2012 surplus underlines how, owing to the greater uncertainty it has engendered, the crisis has also hampered efforts to reduce the overall German current account surplus. The increased desire for safe investments has played a role in this. Safe-haven effects tend to boost the investment income subaccount, which generates a structural surplus thanks to Germany’s high level of net external assets.

According to the latest data, Germany’s current account surplus has ex-ceeded the threshold of 6% of GDP – which is a benchmark score under the EU procedure for the surveillance of macroeconomic imbalances – for more than five years now. In view of the determinants of this development, however, it would be inappropriate to take short-term measures to push up domestic demand in Germany. Instead, there is a need for political action geared to continuing the necessary adjustment processes in the crisis countries and creating a sustainable institutional architecture for monetary union as a whole. This would cause uncertainty to recede, thus helping to reduce the German current account surplus.

In 2012, Germany’s financial account with the rest of the world was likewise very much influenced by the financial and sovereign debt crisis and the steps taken to alleviate it. Overall, the account recorded net capital exports of €235 billion in 2012, most of which stemmed from public sector financial transactions. This was driven by a further increase in claims under the TARGET2 payment system together with government assistance to the programme countries. The portfolio investment account also saw capital outflows. The high demand for German government bonds was more than offset by countervailing transactions in other securities segments. Lastly, the direct investment subaccount – which is generally guided by longer-term considerations – likewise recorded a net capital outflow. Moves by German firms to further expand their presence abroad were the main reason for this.

Banks’ internal methods of calculating and ensuring internal capital adequacy and their importance to banking supervisors

Capital adequacy as well as effective management of banks’ internal capital adequacy are material preconditions for financial system stability. Supervisors therefore attach considerable importance to ensuring internal capital adequacy. Germany’s internal capital adequacy requirements are based on the relatively small number of principles-oriented standards laid down in Pillar Two of the 2004 Basel II framework. The core requirement to be met by institutions is the establishment of an Internal Capital Adequacy Assessment Process (ICAAP) with the goal of ensuring capital adequacy.
Under the ICAAP, the institution is required to identify the material risk types, to quantify them using its own methods and to hold adequate capital to back them; this capital must be of sufficient quality to absorb any losses that may arise. In order to ensure internal capital adequacy on an ongoing basis, it must be enshrined in banks’ decision-making processes, their business and risk strategies and their risk management and risk control processes. This requires ICAAP to be, amongst other things, an integral part of banks’ limit systems and internal reporting frameworks. As part of the Supervisory Review and Evaluation Process (SREP), banking supervisors regularly review and evaluate the suitability of banks’ methods and processes, as well as their capital adequacy.

Experience shows that the methodology of German credit institutions’ ICAAP has evolved significantly since 2004. However, there is still room for improvement – as a case in point, risks should be assessed in a more comprehensive, forward-looking manner than they have been up to now. Moreover, institutions should analyse the limits of the methods used for quantifying risks more intensively. To eliminate any potential deficits in the ICAAP, supervisors resort to a broad toolkit of measures, such as ordering institutions to rectify methodological or process-related deficiencies or especially imposing higher capital requirements. As regards the ratio of available financial resources (AFR) to risks, the deep marks left by the financial market crisis are currently still visible across institutions and groups of institutions. Although many institutions have recovered from the critical condition they were in at the height of the crisis, further efforts are still necessary to ensure institutions’ internal capital adequacy in both the medium and the long term.