The macroeconomic environment is being shaped by the interest rate reversal and heightened uncertainty. So far, the German financial system has coped well with the rise in interest rates over the last year, but the effects of this rise have not yet fully materialised. Structural change in the economy is also likely to further increase credit risk.

The macro-financial environment has deteriorated substantially over the course of 2022. It has been shaped by subdued growth prospects, high inflation as well as rising interest rates and risk premia.

The German financial system has functioned well during the pandemic; the extensive government measures have shielded the financial sector from losses. This is the conclusion reached by the Bundesbank in its Financial Stability Review 2021. 

In the first half of 2020, the global coronavirus pandemic led to the most severe economic slump in Germany in decades. Governments and central banks around the world have taken extensive measures to stabilise the economy as well as labour and financial markets.

The German financial system remains vulnerable to adverse economic developments. Future credit risk could be underestimated and the recoverability of loan collateral such as real estate overestimated.

Times of strong growth and low interest rates have seen vulnerabilities build up in the German financial system. In addition, the probability of an economic downturn has increased.

Given the upbeat prospects for the economy as a whole, there is little risk to the stability of the German financial system at present. Yet with interest rates sitting at low levels for years now and the economy in such robust shape, there is a danger that market participants might underestimate the risks to financial stability, the Bundesbank cautions.

Given its public mandate to safeguard monetary stability, the Bundesbank has an inherent interest in ensuring a stable financial system. As an integral part of the European System of Central Banks, it also has an explicit mandate to contribute to financial stability.

Exceptionally low interest rates remain a salient feature of the financial system setting in Germany. They reflect the global low real economic growth and expansionary monetary policy stance.

The main topics in this year's edition are risks to the stability of the German banking and financial system in the current low-interest-rate environment, developments in the German real estate market and the importance of the banking union for a stable financial system.