German banks vulnerable to the real estate bubble; should create buffers: Bundesbank

FRANKFURT (Reuters) – German banks are increasingly vulnerable to an overvalued property market and financial authorities should force lenders to build capital buffers, the Bundesbank said in a regular stability report on Thursday.

Germany reduced the so-called countercyclical cushion to zero for banks at the start of the pandemic, but economic growth is now robust and bank lending is swift, so they should be forced to hold more capital in anticipation of someday. of rain, the central bank said.

“The countercyclical capital buffer should be replenished very early,” Bundesbank Vice President Claudia Buch said in a statement.

The cushion, now at 0, was set at 0.25% of banks’ total risk exposure before the pandemic, but current credit levels suggest an even higher level may be needed, the Bundesbank added. .

This buffer does not explicitly take into account the booming residential real estate market, which requires careful monitoring and potential action from regulators, the Bundesbank said.

Real estate prices continue to soar and indicators suggest further increases are yet to come, leaving real estate overvalued as price and rental growth outstrips incomes.

“Price exaggerations in the residential real estate market have tended to increase further,” the bank said. “Bundesbank estimates place them between 10% and 30% in Germany in 2020.”

This means that banks can overstate the value of loan guarantees, which exposes them to significant losses in the event of a price adjustment.

Banks are also vulnerable to interest rate hikes, as much of their long-term loans are at fixed rates, especially in the case of mortgages, the Bundesbank added.

(Reporting by Balazs Koranyi; Editing by Alison Williams)

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