FRANKFURT. German banks are becoming increasingly vulnerable to a revaluation of the real estate market, and financial authorities must force lenders to build up capital reserves, the Bundesbank said Thursday in a regular stability report.
The central bank said Germany cut its so-called countercyclical buffer for banks to zero at the start of the pandemic, but economic growth is robust and bank lending is fast at present, so they should be forced to hold more capital to prepare for the rainy day. …
“The counter-cyclical capital buffer must be re-established at an early stage,” said Bundesbank Vice President Claudia Buch.
The Bundesbank added that the buffer, now 0, was set at 0.25 percent of total banks’ exposure to risk before the pandemic, but current lending levels suggest an even higher level may be required.
This buffer clearly does not take into account the booming residential real estate market, which requires close monitoring and possible action by regulators, the Bundesbank said.
Real estate prices continue to rise, and indicators indicate that further growth awaits them, as a result of which real estate will be overvalued, as the rise in prices and rents outstrips income growth.
“Overpricing in the residential real estate market has a tendency to further increase,” the bank said. “According to the estimates of the Bundesbank, in 2020 in Germany they will be from 10 to 30 percent.”
This means that banks can overestimate the value of collateral for a loan, exposing them to large losses in the event of price adjustments.
Banks are also vulnerable to rising interest rates as most of their long-term lending is at fixed rates, especially in the case of mortgages, the Bundesbank added.