As house prices soar, Bundesbank warns German banks against complacency

The deputy governor of the Bundesbank has warned that German banks are becoming too complacent about the risk of borrowers defaulting and the possibility of higher interest rates, especially in the country’s booming mortgage market.

Bundesbank deputy governor Claudia Buch told the Financial Times that banks were relatively unscathed in the recession caused by the coronavirus pandemic, but overly optimistic About the future.

“We believe credit risk is underestimated,” Bucher said. “The models used by banks and market participants are based on historical data. These data may underestimate future macro risks, which is an implicit bias.”

Buch, a member of Germany’s Financial Stability Board, along with officials from the finance ministry and financial watchdog BaFin, added that “we are seeing a shift in banks’ corporate loan portfolios towards relatively weaker companies”.

Although Germany’s economy contracted by 4.6% in 2020 in the wake of the pandemic – a record post-war recession – the number of companies that went bankrupt A sharp decline Benefit from generous government loan guarantees and wage subsidies for furloughed employees.

“all [risk] The metrics we watch, including the credit-to-GDP gap, are up,” Buch said. “We’re worried about mortgages, but we’re also very concerned about this macro environment, which if you look at recent history, it looks too benign , cannot be true. “

One of the most worrying areas was the German housing market, where house prices rose 12% in the year to September and mortgages rose 7.2%, both to their highest levels in decades, despite the aftermath from the pandemic.

German financial watchdog responded last week Announce They asked banks to increase the amount of capital held by banks by 22 billion euros by February 2023 and pledged to monitor lending standards more closely.

That means German banks will need an additional capital buffer equal to 0.75% of their domestic assets and 2% of their residential mortgages – both adjusted for risk. A more moderate version of the policy was proposed in 2019, but then dropped due to the pandemic.

The additional capital buffer – mirroring similar schemes in the UK, Sweden, Norway and Denmark – is designed to increase the resilience of banks by allowing them to absorb potential future losses without having to cut the supply of credit to businesses and households.

The German Banking Association complained that the changes were “ill-timed” in a time of high economic uncertainty and risked “slamming the brakes” on its lending capacity, which could push more business into less regulated mortgage lending business.

German Household Home Loans Line Chart (% YoY) Shows Surge in German Mortgage Market

But Buch said German banks had increased their holdings of excess capital above minimum requirements by around 30 billion euros over the past two years to nearly 190 billion euros, meaning only a “very, very small” amount now needed to be raised. additional capital.

German interest rates have fallen to record lows in recent years after the European Central Bank slashed deposit rates to minus 0.5 percent and bought more than 4.5 trillion euros of bonds. Several banks in the country are offering 10- or 15-year mortgages at interest rates below 1 percent, said Tatjana Gopp of German mortgage advisor Baufi24.

The Bundesbank deputy governor said the proportion of new German mortgages with interest rates fixed for at least 10 years has more than doubled since the housing market started to rise in 2010, so banks have increased “interest rate risk”.

“These outstanding mortgages have a much longer credit term, which means that if interest rates rise, it will be more expensive for banks to refinance, but the value of their assets won’t change much,” she said.

The ECB said, “Not too possible“The rate hike this year, but the market is pricing in a 0.1 percentage point hike in the deposit rate in October.

Low interest rates help boost Germany house price Up nearly 60% since 2015, the Bundesbank estimates the market is now 15% to 30% overvalued.

Buch said she hoped the new rules would “slightly incentivize” lenders to “think twice” and some would offer mortgages for the full value of a property with little or no deposit. If such high-risk mortgages surge, regulators could impose new rules limiting the amount banks can lend against properties.

“The point of this is not to really control the property price cycle, but to make sure that any financing is sound and that borrowers can actually afford it,” she added.

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