The skyscrapers in the town center might be seen from the Lohrberg within the north of Frankfurt. Photo: Arne Dedert/dpa (Photo: Arne Dedert/Alliance photo via Getty Images)
Image Alliance | Image Alliance | Getty Images
Germany’s financial watchdog warned on Tuesday that the country’s banking system is undergoing a real stress test resulting from the present volatility, also predicting significant weakness within the business real estate sector.
The banking industry has been within the highlight since March with the collapse of Silicon Valley Bank and the bailout of several other lenders. The pressure on the sector has intensified as many central banks raise their benchmark rates, resulting in specific market dislocations.
related investment news
Mark Branson, chairman of the German regulator BaFin (Federal Financial Supervisory Authority), told CNBC that Germany has seen the identical effects of higher rates as many other countries all over the world.
He said the German banking system “took some trouble” but stressed there was “no systemic risk” and the economic system had absorbed the consequences of higher rates of interest well.
“At once we do not have a global banking crisis, but we do have a nervous time and kind of a real-life stress test for parts of the system,” Annette Weisbach of CNBC told CNBC.
Overall, higher rates of interest must have a positive impact on banks’ balance sheets. Nonetheless, problems can arise when banks take on additional risks and fail to maintain up with the constant and rapid rise in rates.
As such, the volatility seen within the US has raised questions on which European lenders can also be in danger. Deutsche Bank’s shares got here under pressure in late March, for example, amid speculation in regards to the stability of its balance sheet. Credit Suisse needed to be bailed out by its rival UBS.
Data released last week showed that banks within the eurozone had began tightening lending conditions and borrowers were also demanding less credit. This dynamics may translate into further economic slowdown.
“We do not know if the speed hike part of the cycle is over and we’ve not yet seen all the consequences of the speed hikes we already had on markets and valuations,” Branson said on Tuesday.
In actual fact, the president of the European Central Bank, Christine Lagarde, said last week that there are probably more grounds for raising rates of interest.
However it’s not only the banking sector that’s adjusting to a latest environment of higher rates of interest after greater than a decade of very low borrowing costs. The real estate market, which is closely related to banks, can be heavily affected by changes in rates of interest.
“After we take a look at real estate, we focus probably the most on business real estate, not only German real estate,” said the pinnacle of BaFin.
“There will probably be stress on this market,” he said, adding that there may very well be some credit risk issues on this part of the market.
Speaking over the weekend, 92-year-old investment icon Warren Buffett also highlighted that the business real estate market has begun to feel the implications of higher borrowing costs.
It is because higher rates of interest make it more costly for borrowers to buy seats and refinance loans. At the identical time, greater flexibility in working from home has also modified some of the demand for business real estate.