Frankfurt
“Stress phases often develop in spurts,” says the President of Bafin.
(Photo: dpa)
After the bankruptcy of several US banks and the emergency sale of Credit Suisse, the German financial regulator Bafin is preparing for continued turbulence on the financial market. “It is not certain that this difficult phase – this real-time stress test – is behind us,” said Bafin President Mark Branson on Tuesday in Frankfurt.
It was always clear that the central banks’ exit from the low interest rate policy would cause problems, emphasized Branson. Further interest rate hikes are also not excluded. Also, not all of the effects of previous interest rate increases are visible because valuations on the markets are only adjusted with a time lag.
Banks would therefore have to prepare for further headwinds. “Stress often comes in spurts,” Branson said. In addition to the interest rate shock, there could also be more loan defaults and a slump on the markets. “Some of the market valuations are still surprisingly high when you look at the economic situation we have.”
In the lending business, Branson sees the greatest risks in financing offices and other commercial real estate. Here the stress will increase worldwide. “I would see that as more worrying than the housing market here in Germany.”
In the United States, three regional banks have collapsed since March after customers there withdrew their deposits at a record pace. In Switzerland, the struggling major bank Credit Suisse is being sold to its competitor UBS.
“Bank runs and liquidity crises happen much faster now than they used to,” Branson said. “Information and rumors can be spread within seconds via social media. And withdraw deposits via online banking.”
Branson: “There are also irrational fears”
There are currently no rational reasons for a liquidity crisis at German institutions. “But there are also irrational fears,” Branson said. “One should not underestimate this psychological factor: depositors and counterparties are not immune to it in any banking market in the world.”
Basically, Branson considers the German banking system to be “stable and resilient”. Many large banks have hedged against interest rate risks and are therefore in a stronger position. “They are already benefiting from the higher interest rates and are posting higher income.”
On the other hand, smaller institutes such as savings banks and Volksbanken had to write off almost 13 billion euros on their securities portfolios due to the interest rate turnaround last year. However, they were able to absorb these losses thanks to high reserves and capital cushions.
Bafin executive director Raimund Röseler assumes that most banks will not have to realize their losses because they will hold the affected bonds until the end of the term. In contrast to the USA, no institution in Germany has been forced to sell bonds at losses in order to plug liquidity gaps.
According to Röseler, the German banking sector currently has between 120 and 130 billion euros in excess capital to absorb potential losses. For some smaller financial institutions, however, things could get tight. “We have a few institutes, there are a good two handfuls, in our intensive focus.”
Some of the affected banks have high interest rate risks and low reserves and capital buffers, said Bafin boss Branson. Others have governance problems or no viable business model.
Bafin calls for revision of banking rules
In response to the recent bank failures in the US, Branson is calling for regulatory adjustments. In his view, in order to be prepared for interest rate risks, banks should form additional equity buffers as standard. So far, the financial supervisory authority has only determined capital surcharges for interest rate risks individually if it deems it necessary for certain institutions.
In addition, from Branson’s point of view, the liquidity regulations for financial institutions must be tightened. In the most recent bank failures, companies and wealthy customers withdrew their excess liquidity much more quickly than is assumed in the models for calculating regulatory ratios.
Branson acknowledged the goal that it should be possible to wind down large banks so that they do not have to be bailed out by the state in times of need. Nevertheless, he conceded that the support of large banks would not work without temporary help from the state because the liquidity requirements in such situations are exorbitant.
“It needs a government liquidity guarantee,” said Branson. There are fixed rules in the USA and Great Britain, but not in Switzerland and the EU.
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