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G-FSC annual report: German financial system stable so far in the crisis

Germany’s financial system has been stable so far in the coronavirus pandemic and has performed its functions. These are the findings reached by the German Financial Stability Committee (Ausschuss für Finanzstabilität – G-FSC) in its eighth report on financial stability, published on 1 June. As the central body for macroprudential oversight in Germany, the G-FSC is composed of high-level representatives from the Federal Ministry of Finance, the Federal Financial Supervisory Authority (BaFin) and the Bundesbank. The Bundesbank is represented on the G-FSC by Vice-President Claudia Buch, Executive Board member Joachim Wuermeling and Benjamin Weigert, Director General Financial Stability.

Presenting the report, Claudia Buch said that the financial system has so far been shielded from major losses, noting that “measures in the domains of fiscal policy, monetary policy and supervision played a particular role in this respect”. However, she also stressed that it was still uncertain whether the extensive stabilisation measures had prevented or merely postponed losses in the German financial system.

Risk of rising corporate insolvencies

Scenario analyses suggest that the German banking system is likely to be able to cope with a strong rise in corporate insolvencies and associated losses and write-downs, the report writes, partly because the banking system is more resilient than it was prior to the global financial crisis of 2007-08. It has been structurally enhanced by more capital and additional capital buffers. The willingness of banks to use their macroprudential capital buffers if required can play a key role in stabilising lending in a stressed period and thus help preserve financial stability. Furthermore, supervision has been improved, and ailing banks can be dealt with in a more targeted way.

Vulnerabilities continue to exist

In its assessment of the current risk situation, the report notes that the vulnerabilities in the German financial system identified prior to the onset of the pandemic continue to exist. The risks stemming from lending in the residential real estate market are one example. Prices in the residential real estate market are continuing to rise unabated. Alongside robust income growth in the household sector, the low interest rates were a key factor behind the continued dynamism in the residential real estate market during the reporting period. Overall, however, the residential real estate market is not an acute source of risks to financial stability at the present time, the report notes. The coronavirus pandemic could change the dynamics of the commercial real estate market, as it hit the segments of this market with varying intensities. Prices for retail properties fell, for instance.

Claudia Buch reported that the factors fostering the build-up of vulnerabilities still exist, which is one of the reasons why “macroprudential policy should switch back from crisis mode to preventive mode in good time”. 

The G-FSC’s tasks

The G-FSC was created in order to implement one of the key lessons learned from the global financial crisis of 2007-08, which was that the stability of individual market actors does not necessarily guarantee the stability of the financial system; rather, risks to financial stability can only be identified if the financial system is observed in its entirety. This is why the G-FSC has been monitoring the risk situation in the German financial system ever since the committee was established in 2013. It can also issue warnings and recommendations if required as a way of highlighting risks or recommending the deployment of macroprudential instruments, for example. By publishing its annual report, the G-FSC regularly informs policymakers about its activities and the risks to financial stability in Germany.