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Bundesbank Warns of Financial Stability Risk—from the EIR Strategic Alert in Europe

Dec. 4, 2017 (EIRNS)—Although using the typical understatement of banker language, the 2017 Financial Stability Report of the German Bundebank sees risks of a financial meltdown in both cases, of a rise in interest rates and of a continued low level of interest rates. This is a Catch-22 situation (or, damned if you do, damned if you don’t), which offers only one solution: replacing the current bankrupt system with a Glass-Steagall one.

There are several indications, the report says, that risk-premia are systematically too low and risks are therefore underestimated. On the basis of the low interest rates, there is especially the risk that solvency of market participants is overestimated.

"Risks for the stability of the German financial system remain and could increase. They could result from a sudden increase of interest rates as well as from a continued low rates level. Here there is a danger that risks emerge from value corrections [sic] of wealth assets, interest rates change and credit [events], and they increase each other."

The critical condition of German banks is shown by the fact that banks have increasingly borrowed at short-term and floating interest rates, and invested at long-term, fixed rates, creating a dangerous imbalance in case of a "correction" of interest rates or other external shocks. Particularly exposed are community banks, the report says. In particular, the claims towards non-banks have increased and are particularly high among saving banks and credit unions. At the same time, the average rate of short-term, one-day-maturity deposits has significantly increased.

The rate of residential housing credits with a ten-year fixed rate has increased from 23% to 45% in the last fourteen years. In case of an increase of interest rates, banks will be forced to pay yields on deposits, higher than their return on those long-term investments. This represents a large systemic risk, given the volume of credits involved.

At the same time, a continued low-interest policy could increase the incentive to take increased risks in order to achieve higher returns and thus get banks in trouble.

The report analyzes the price dynamics of the residential housing market, noticing with concern that housing prices in the largest German cities were, by one metric, 15-30% overvalued in 2016, as compared to only 10-20% in 2015.

Whereas the Bundesbank warns about systemic risks, the European Central Bank (ECB) is in a state of denial. Answering questions from members of the Economic and Monetary Committee of the European Parliament Nov. 20, ECB head Mario Draghi said that he saw no bubbles and no systemic risk.