“An intensification of the energy crisis represents a possible risk scenario for the financial system.”
(Photo: imago images/IPON)
The Bundesbank is concerned about the stability of the financial system in view of the volatile stock markets and fears of a recession. The situation was characterized by subdued growth prospects, high inflation and rising interest rates and risk premiums, the Bundesbank announced on Thursday when it published its latest report on financial stability.
A slight recession is predicted for 2023. “All in all, the macroeconomic risks have increased and the financial system remains vulnerable to these risks,” said Bundesbank Vice President Claudia Buch.
The financial situation of companies has deteriorated, insolvencies are likely to increase and private households have lost purchasing power. “These factors weigh on the financial system,” said Buch. Banks, insurers and investment funds have already recorded losses due to price corrections on the stock exchanges.
Higher and extremely volatile exchange prices for energy products have led to a significant increase in the collateral requirements for derivative contracts. “Even if the situation on the energy exchanges has eased, an intensification of the energy crisis represents a possible risk scenario for the financial system,” explained Buch.
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In addition, according to the Bundesbank, an abrupt rise in interest rates on the markets would put many borrowers and financial institutions under pressure. The financial institutions should examine the possible effects of negative scenarios on their business, said Bundesbank board member Joachim Wuermeling. “In view of the high level of uncertainty, you should make prudent risk provisions and only carefully distribute profits,” he explained.
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The European Central Bank (ECB) recently reported that there were increased risks to financial stability in the euro area. ECB Vice President Luis des Guindos referred to the rise in energy prices and inflation rates and the slowdown in the economy. The vulnerabilities of households, companies and states that have more debt have increased.
The ECB also included tensions in the financial markets among the dangers. Banks have benefited from the meanwhile higher interest rates. However, there are signs that asset quality is deteriorating.
More: ECB chief economist Lane sees fewer reasons for another mammoth rate hike