BBK Vice President Buch: Macrofinancial Environment Faces Risks

28 September 2021

By David Barwick – FRANKFURT (Econostream) – German Bundesbank Vice President Claudia Buch warned on Tuesday of the build-up of risks in the German financial system that could materialise in the wake of a stalled recovery or surprisingly high inflation.

In remarks at a panel discussion, Buch noted that the economic recovery was proceeding faster than expected, diminishing corporate solvency and bank credit risk.

‘Despite the brighter outlook, there are risks to the macrofinancial environment’, she said. ‘New waves of infections and continued disruptions in global supply chains could set back the economic recovery. An unexpected rise in inflation could lead to increasing risk premia and interest rates. This may trigger corrections in financial markets.’

Among the mechanisms that could create problems, German banks had been extending credit to higher-risk companies even before the pandemic, she said, and the pandemic exacerbated this risk. Buch cited Bundesbank estimates according to which in 2020, the 50% weakest companies constituted between 70% and 80% of German banks’ aggregate loan portfolio.

An additional issue, she said, is that ‘an unexpected increase in funding costs would put pressure on interest rate margins and affect the valuation of assets.’ Moreover, rapidly climbing real estate prices and mortgage lending are another source of vulnerabilities, she said.

‘The ongoing low interest rate environment provides incentives to search for yield and encourages risk-taking’, she said. ‘This might increase vulnerabilities with regard to changes in macrofinancial conditions, including a sudden repricing of risks.’

Buch observed that the concerns a year ago about a possible wave of corporate bankruptcies had not been borne out. This was partly because firms were temporarily allowed to defer declarations of bankruptcy, giving them time to recover, she said.

‘Second, fiscal measures supported the liquidity and solvency of firms’, she continued. ‘Third, as the economy recovered, pressure on firms weakened, and forecasted insolvencies declined.’