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30 June 2015

Financial markets


Fi­nan­cial Sta­bil­i­ty Com­mit­tee adopts an­nu­al re­port to the Ger­man Bun­destag and rec­om­mends cre­ation of new macro­pru­den­tial in­stru­ments

  • Number 22

German Version

In its meeting on 30 June 2015, the Financial Stability Committee discussed the current risk situation in financial markets, including the market reaction triggered by the events in Greece. The Committee considers the consequences for the German financial system to be minor. It sees the German financial system as robust; to a large extent, German financial institutions have reduced their exposure to Greece a while ago.

Other than that, the Financial Stability Committee issued a recommendation to the federal government to create what it called “national macroprudential instruments for the residential property market”. This involves granting supervisors additional intervention powers aimed at preventing any credit-fuelled overheating of the German property market.

In addition, the Financial Stability Committee adopted the second annual report to the German Bundestag on the Committee’s activities. The Committee was also briefed on the current status of the preparatory work for an additional countercyclical capital buffer for banks. As of 2016, supervisors will generally be able to begin levying a capital surcharge to build up this buffer. In the future, the Committee will discuss the question of the appropriate size of this buffer on a regular basis.

German Finance Ministry State Secretary Thomas Steffen commented: “It is the task of the Financial Stability Committee to observe the development of risks in the German financial system. The risks from the latest developments in Greece are important for Greece. However, for the German financial system, few contagion channels remain. That is why we consider risks to be minor. The Committee furthermore has to watch medium and long term risks resulting from the current low interest rate environment. It has to act, if necessary. This is why we decided today to supplement supervisors` macroprudential toolkit.”

Current risk situation and report to the Bundestag

Irrespective of the current developments in Greece, the Financial Stability Committee regards the low interest rate environment as the most important factor influencing the current risk situation. In this context, the Committee discussed, in particular, the effects of low interest rates on the German residential property market, German banks and German life insurers. The results of analytical studies and stress tests indicate that supervisors should continue to keep a close eye on macroeconomic risks.

The low interest rate environment was already the focus of the Committee’s work last year. According to the Committee’s second report to the German Bundestag (no English version available), the risk situation in the German financial system was mainly influenced by two factors in the period from April 2014 to March 2015: (i) the continued loosening of monetary policy, which led to a further reduction in interest rates in an environment of ample liquidity, and (ii) increasing risks and uncertainties arising from the European and international sphere, such as renewed uncertainty about the future course of economic and fiscal policy in Greece, the Russia-Ukraine conflict and the drop in oil prices.

Claudia Buch, Deputy President of the Deutsche Bundesbank, commented: “The current low interest rates continue to pose risks to financial stability. There are also additional risks arising from the European and international sphere. German banks and life insurers should therefore build up sufficient capital reserves and, if necessary, retain profits to ensure that they are well-equipped to deal with macroeconomic risks.”

Creation of minimum standards for residential real-estate loans

The Committee recommends that the federal government initiates, by the end of March 2016, the creation of a legal basis which would allow the Federal Financial Supervisory Authority (BaFin) to introduce minimum requirements for the credit-based financing of residential property purchases (including, among other things, the minimum amount of equity that must be provided and minimum debt repayment rates), should such rules be regarded as necessary in the future. In this way, risks to financial stability arising from excessive debt and price bubbles on the real estate market can be limited.

The creation of additional macroprudential instruments of this kind is also supported by the international institutions that are responsible for questions of financial stability, namely the International Monetary Fund, the Financial Stability Board and the European Systemic Risk Board. Several other European countries have also recently upgraded their macroprudential instruments. The recommendation to create such instruments that was issued today is a preventive measure; there are no signs of a specific need to use them at the current point in time.

BaFin President Felix Hufeld commented: “I want to make one thing clear once again: The Committee is recommending that the federal government creates new macroprudential instruments. We have to be well prepared and capable of taking action, if and when that becomes necessary, i.e. when risks become acute.However, we are not going to take any action at this stage.”

The rec­om­men­da­tion [PDF, 152KB] can be downloaded from the Federal Ministry of Finance website. It will also be published in the Federal Law Gazette.

Background information on the Financial Stability Committee

The Financial Stability Committee is the central body for macroprudential supervision of the financial system in Germany. The Committee, which held its inaugural meeting on 18 March 2013, is intended to enhance macroprudential supervision focussing on the stability of the entire financial system.

Background information on the Committee and the text of today’s decisions are available online (FAQs) (no English version available).

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