Russia’s invasion of Ukraine led to a sharp increase in uncertainty in the financial markets. Worldwide, risks were repriced and there was a significant shift from risky assets to assets deemed safe, such as government bonds. Financial market reactions, whilst considerable in some instances, played out for the most part in an orderly fashion in western countries. So far, there have been no serious disruptions to the functioning of the German financial system.
The direct effects of the war are manageable for the German financial system as a whole. German financial intermediaries’ direct exposure to debtors in Russia, Ukraine and Belarus is small overall. However, macroeconomic conditions have worsened as the war has drawn on. Inflation has risen significantly, while the outlook for growth has deteriorated. The FSC will continue to analyse and assess the effects of the war. Risks to financial stability could be elevated if adverse real economic developments were to coincide with an abrupt interest rate hike.
The Financial Stability Committee also noted that pandemic-related risks in the German financial system decreased during the reporting period, but that previously existing vulnerabilities continued to build up. Interest rate risk increased, as did the risk of underestimating credit risk and overvaluing assets, especially residential real estate.
Given the heightened risk situation, the Financial Stability Committee welcomed the package of macroprudential measures announced by the Federal Financial Supervisory Authority (BaFin) in January 2022. The aim of these measures is to strengthen the resilience of the German financial system in a preventive and targeted manner. BaFin raised the countercyclical capital buffer to 0.75% of domestic risk positions and additionally introduced a sectoral systemic risk buffer of 2% on risk positions secured by residential real estate. Supervisors also called on lenders to be particularly prudent in the granting of residential real estate loans and to apply conservative lending standards. Banks can satisfy the additional requirements almost entirely by using existing surplus capital.
The FSC continues to consider these measures appropriate in the current macro-financial environment and will continue to monitor and assess developments. If necessary, the FSC can recommend to adapt the measures to a change in the risk situation. Furthermore, Bundesbank and BaFin continually review whether further measures need to be taken, such as limiting the loan-to-value ratio (LTV).
In the reporting period, further topics discussed by the FSC included the possible effects of climate and cyber risk on financial stability. The latter became more relevant as a result of Russia’s war against Ukraine.