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18 June 2014

Public Finances

Fi­nan­cial Sta­bil­i­ty Com­mit­tee presents first an­nu­al re­port

On 16 June 2014, the Financial Stability Committee, which was established last year, presented its first report on financial stability in Germany to the German Bundestag.

The Financial Stability Committee’s report describes the current situation as well as trends that are relevant to financial stability and provides information about the Committee’s activities during the period from its establishment in January 2013 up until March 2014. In its report, the Committee concluded that the situation in Germany regarding financial stability had improved during the period under consideration. Nevertheless, a number of risks still remain. For example, vulnerabilities still exist in relation to claims against debtors in countries that have been particularly hard hit by the European debt crisis and with regard to claims against economically weak sectors. Additional challenges could also result from structural changes in the financial system, due to the increasing importance of shadow banks, for example. Furthermore, the ongoing low interest rate environment also has an impact on the stability of the German financial system.

In general, low interest rates and generous financial framework conditions could create a fertile environment for the emergence of risks to financial stability. In this context, the Committee took a particularly close look at trends in the residential real estate sector. The Committee did not detect any self-reinforcing spiral of unsustainable price increases, rising debt levels and easing of lending conditions during the period covered by the report. However, the Committee will continue to keep a careful watch on developments in the residential property market.

In the banking system, the low interest rate environment is exacerbating structural weaknesses in terms of earnings at many credit institutions. With regard to life insurance companies, the ongoing period of low interest rates in conjunction with minimum guaranteed rates of return (which are standard in policies) are putting pressure on earnings. The federal government reported on the goals of its reform package for the life-insurance sector.

Risks to financial stability could also arise as a result of shadow banking activities. The shadow banking system in Germany is relatively small compared with other countries, as a result of the regulatory framework in place. However, regulators must keep a careful eye on possible repercussions from the activities of foreign shadow banks.

Ultimately, the Committee’s work involves analysing and operationalising macroprudential instruments, so that the responsible bodies can take action to counter adverse developments, if necessary. This work will also be continued in the current year.

The report can be accessed on the Federal Ministry of Finance website at http://www.bun­des­fi­nanzmin­is­teri­­nanzsta­bil­i­taet [PDF, 2MB] (in German).

Background information on the Financial Stability Committee

The Financial Stability Committee is the central body for macroprudential financial supervision in Germany. The financial crisis made it clear that there was a need for more intensive macroprudential supervision focussed on the stability of the financial system as a whole. In addition, there needed to be closer links between macroprudential and microprudential (i.e., institution-specific) supervision. The Committee was set up to address these concerns. In the future, the Committee will report on its work to the German Bundestag on an annual basis.

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