Bundesbank Urges Vigilance Amid Growing Risks to Germany’s Financial Stability

With increasing global uncertainty following the US presidential election and persistent geopolitical tensions, the German financial system faces elevated risks that demand both attention and action. The Bundesbank’s latest Financial Stability Review presents a comprehensive assessment of the macro-financial environment and outlines the emerging vulnerabilities and responses needed.

The report highlights that Germany's export-driven economy is under strain from recent shifts in US trade policy, including new tariffs on EU imports, which inject additional volatility into an already fragile global backdrop. Domestically, weak economic growth — forecasted at just 0.2% this year — is compounded by structural challenges such as demographic shifts, high energy costs, and bureaucratic hurdles. Looking ahead, the potential for sustained growth remains low, underscoring the need for decisive structural reforms to reinforce economic foundations and overall financial stability. Furthermore, the review warns about the expanding threat of cyberattacks, recommending greater investment in digital defenses to safeguard the financial sector.

Rising government debt, both in Germany and across Europe, presents another key concern. The Bundesbank notes that recent fiscal packages have led to higher debt ratios, which, without credible fiscal discipline and stable growth, could undermine long-term financial security. Within credit markets, signs of tentative recovery are evident, especially in housing, yet the commercial real estate sector remains vulnerable. High asset valuations and low risk premiums in equity and credit markets also point to the risk of sharp market corrections with potential spillovers to financial intermediaries.

Regarding banks, the Review finds that non-performing loans have increased steadily, especially in commercial real estate, albeit overall exposures remain contained. While current profitability is buoyed by higher interest income, further trade tensions and tariff hikes could prompt additional loan loss provisions. Nevertheless, German banks maintain robust capital buffers, though the underlying risk weights may underestimate some vulnerabilities.

The growing influence of non-bank financial intermediaries (NBFIs), such as insurers and investment funds, adds complexity to the financial system through strong interconnectedness with banks and cross-border exposures. While the NBFI sector remains largely robust, certain vulnerabilities surfaced earlier this year amid US tariff announcements, particularly for German retail funds facing liquidity strains. The Bundesbank emphasizes the necessity for better data sharing and monitoring to manage systemic risks emerging from these interconnections.

In terms of policy response, the Bundesbank backs the existing macroprudential measures, such as capital buffers for banks, but advocates for simplification and streamlining of regulatory requirements, especially for smaller institutions. It also stresses the importance of enhanced cross-border transparency for the NBFI sector to detect and preempt amplifying risks.

This comprehensive review reinforces that, in an era of rising uncertainty and interconnected threats, proactive oversight and reform are crucial to preserve Germany’s financial stability and resilience.