Bundesbank: German Banks Reckless

By: EW News Desk Team   Date: 2 December 2010

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EW News Desk Team

Always on the look out for the latest news to monitor the state of the world economy.

EconomyWatch, News Desk Team

 

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02 December 2010

The Bundesbank, the German central bank, said in its annual financial stability report that 

German institutions continue to engage in risky practices that make them vulnerable to a rise in interest rates.

“Thanks to stable returns and improved capital, German banks have increased their ability to withstand risk,” 

Andreas Dombret, a member of the central bank’s executive board, said at a news conference. 

But “as before the German bank system still displays vulnerabilities and structural weaknesses.”

Despite Germany’s economic growth, its banks are among Europe’s weakest. 

Moody’s, the ratings agency, ranks the average health of German banks 

BELOW those of most other Western European countries, 

as well as nations like Brazil, Jordan and Mexico.

In its report, the Bundesbank warned that German banks had increased their dependence on short-term financing, 

a profitable but risky practice because institutions can be caught short if interest rates rise.

About 30 percent of German bank debt will mature in less than a year, the bank said, well above the long-term average of 22 percent. 

Hypo Real Estate, a German property lender now owned by the government, nearly collapsed in 2008 

because it could no longer borrow money short term at rates below what it was receiving in interest from customers with long-term loans.

“As part of a renewed increase in the ‘search for yield,’ new bubbles could form in certain securities markets,” Mr. Dombret said.

Banks continue to face significant losses from problem assets like investments in the American real estate market, the Bundesbank said. 

However, the losses will be lower than in 2009 and at the low end of expectations.

The Bundesbank estimated that banks would book losses of 23 billion euros, or $30.75 billion, this year 

to reflect the diminished value of their holdings, down from 37 billion euros in 2009.

Though new banking regulations, known as Basel III, will create a more stable system, the Bundesbank said, 

German banks will need to raise about 50 billion euros by 2018 to meet higher reserve requirements. 

Most of the burden will fall on the larger, international banks.

The report did not mention banks by name, but Germany’s largest institutions are Deutsche Bank and Commerzbank as well as the landesbanks, 

which are owned by local governments and groups of savings banks.

Though banks are more profitable this year than last, the Bundesbank signaled that 

a long period of muted returns is in store as banks sell riskier assets and build capital.

Said Franz-Christoph Zeitler, a member of the bank’s executive board, 

“Fundamentally, there will be a short-term reduction in return on equity."


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