German regulator warns of a ‘nervous time’ for banks, predicts asset market stress


The skyscrapers of the city center can be seen from the Lohrberg in the north of Frankfurt. Photo: Arne Dedert/dpa (Photo by Arne Dedert/Picture Alliance via Getty Images)

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Germany’s financial regulator warned on Tuesday that the country’s banking system is undergoing a real-life stress test amid current volatility, while also predicting significant weakness for the commercial property sector.

The banking sector has been in the spotlight since March with the collapse of Silicon Valley Bank and the rescue of several other troubled lenders. The pressure on the sector has increased with several central banks raising their benchmark rates. Leading to typical market dislocations.

Mark Branson, chairman of German regulator BaFin (Federal Financial Supervisory Authority), told CNBC that Germany has seen similar effects from higher rates as many other countries around the world.

He said the German banking system “has taken some pain,” but highlighted that “there is no systemic threat” and that the financial system has managed to absorb the effects of higher rates well.

“We don’t have a global banking crisis at the moment, but we do have a nervous time and a kind of real-life stress test for parts of the system,” he told CNBC’s Annette Weisbach.

Generally speaking, higher interest rates should be positive for banks’ balance sheets. However, problems can arise when banks take on additional risk and fail to maintain a sustained and rapid increase in rates.

As such, the volatility seen in the United States has raised questions about which European lenders may also be at risk. Deutsche Bank shares came under pressure In late March, for example, amid speculation of the stability of its balance sheet. Credit Suisse ended up being rescued by its rival UBS.

Data released last week showed that banks in the euro zone have started tightening terms for loans, while borrowers have also demanded fewer loans. These dynamics could translate into another economic downturn.

“We don’t know if the rate hike part of the cycle has passed and we haven’t seen all the effects of interest rate hikes that we’ve already seen in markets and valuations,” Branson said Tuesday.

In fact, European Central Bank President Christine Lagarde said last week that there was likely more ground to raise rates.

But it is not just the banking sector that is adapting to a new environment of higher rates after more than a decade of extremely low borrowing costs. The real estate market, tightly linked to banks, is also heavily influenced by changes in interest rates.

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“When we look at real estate, where we are most focused is commercial real estate, not just German,” the BaFin chief said.

“There’s stress coming into that market,” he said, adding that there may be some credit risk issues in that part of the market.

Speaking over the weekend, 92-year-old investment icon Warren Buffett also highlighted that the commercial real estate market has started to experience the consequences of higher borrowing costs.

This is because higher interest rates make it more expensive for borrowers to buy the space and refinance their loans. At the same time, greater flexibility in working from home has also led to some change in the demand for commercial property.

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