Financial stability in 2012 – an overview
The risks to the German financial system remain high. The European sovereign debt crisis is still largely dictating the risk situation, having broadened in the course of 2012 and come to a head at various points in the year. On several occasions, doubts were even cast over the long-term survival of European monetary union. Spain and Italy – two major economies – have increasingly been drawn into the crisis. Crisis management measures have now led to a substantial transfer of risk from the private to the public sector.
At the same time, they have caused the low-interest rate environment to become entrenched and encouraged investors to search for yield and take on greater risks. Savers are increasingly channelling their funds into forms of investment which they view as a hedge against monetary and exchange rate instability.
This is contributing to the rise in real estate prices in Germany’s urban centres. Robust household debt sustainability, moderate lending growth and cautious lending standards in Germany are currently preventing a rapid build-up of risks to financial stability.
Yet the experiences of other countries show that precisely such an environment of low interest rates and high liquidity can encourage exaggerations on the real estate markets which pose a considerable threat to financial stability.
Five years on from the outbreak of the global financial crisis, the German financial system has grown more robust. Banks have more – and better-quality – tier 1 capital. However, cyclical and structural developments could hamper their profitability in the future.
Overall, good progress is being made in implementing the comprehensive plans to reform financial market regulation. The need now is to assess how successfully the flaws in the financial system have been eliminated and identify any potential problems concerning the coherence of the new framework. In Germany, the Financial Stability Act (Finanzstabilitätsgesetz) establishes a legal framework for macroprudential oversight.
The complete report can be found here (DeutscheBundesbankFinancial-Stablity-Review-2012).