At its December meeting, the Financial Stability Committee (FSC) assessed the current risk situation in the German financial system. Despite rising uncertainties with regard to the pandemic, the current macrofinancial environment is conducive to a build-up of medium-term vulnerabilities in the German financial system. The FSC found that the cyclical vulnerabilities that existed prior to the pandemic have increased and that there are clear indicators of heightened risks to financial stability. For example, lending to German companies is rising sharply, risk premiums on corporate bonds are lower than they were before the pandemic in some cases, and high valuations in some market segments harbour potential for setbacks. The recovery of the real economy can be expected to continue, although the current sharp rise in Covid-19 cases makes it difficult to forecast economic trends reliably.
The FSC concluded that macroprudential policy should return to prevention mode. The FSC and its member institutions will continue to keep a very close eye on the risk situation. Given the existing uncertainties over economic trends, the FSC will assess which instruments should be activated swiftly in 2022 to address the identified risks as effectively as possible.
Trends in the residential real estate market are contributing to the cyclical vulnerabilities. Residential real estate prices are rising sharply and the rates of growth have reached historic highs. Overvaluations and debt levels are on an upwards trajectory. At the same time, residential mortgage lending has recorded a strong rise. If lending and price trends on the residential real estate market as well as household debt trends continue, there is a risk that debt sustainability may deteriorate, especially among borrowers who take out new loans.
For this reason, the FSC calls on banks and insurers to be prudent when granting residential mortgages and to avoid perpetuating the current price rises. This also includes ensuring that the ratio of the total amount borrowed to the market value of the purchased real estate (loan-to-value ratio, LTV) should be handled prudently. Moreover, given the current low interest rate environment, lenders should place special emphasis on borrowers’ debt sustainability and agree on suitably high repayment rates, not least with a view to potential future remortgages.