“Too early for the all-clear”
Rising interest rates could still cause problems for banks
November 23, 2023, 3:52 p.m
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Many financial institutions benefit from the ECB’s constant increases in key interest rates. However, the Bundesbank is now warning of the risks of the interest rate turnaround. Some effects could still occur and cause problems.
According to the Bundesbank, the negative effects of the rapidly rising interest rates could still cause problems for Germany’s banks. Overall, it would be premature to give the all-clear, said Bundesbank Vice President Claudia Buch in Frankfurt. The effects of the increased interest rates have not yet fully materialized.
“On the one hand, increased economic risks have hardly been priced into the financial markets so far,” explained Buch, who will move to the European Central Bank (ECB) on January 1, 2024 and become the top banking supervisor there. “Given high macroeconomic uncertainty, there is an increased risk of corrections in market prices and corresponding losses.” On the other hand, banks’ interest expenses are likely to rise and the interest income, which has recently risen significantly, is likely to decline again.
Many financial institutions are benefiting from the fact that the ECB has raised key interest rates in the euro area ten times in a row since July 2022, because, for example, they earn from higher loan interest rates and receive interest again when they park money with the ECB.
However, Bundesbank simulations show that if the banks had passed on higher interest rates to savers as quickly as in the past, net interest income this year would have been 29 billion euros, a third lower.
Risks from commercial real estate
“At the same time, it is becoming more difficult to offset rising interest costs through new loans with higher interest rates,” explained Buch. Many banks have long-term loans with relatively low interest rates on their books, and demand for new financing has been weak in recent months. The interest rate turnaround has led to falling prices on the real estate market.
“In the short term, we see particular risks from the commercial real estate sector,” said Buch. “Risks from the financing of residential real estate are still limited, but should remain the focus of institutions and supervisors.”
In addition, according to the Bundesbank, restructuring the economy towards more climate neutrality is likely to increase the risk that loans will no longer be serviced. The upcoming structural change also means “more bankruptcies and increasing credit risks,” explained Buch.
So far, the German financial system has coped well with the rise in interest rates. In the opinion of the Bundesbank, banks should use their recently increased profits to strengthen their resilience to stress phases.