Warning from the Bundesbank against financial stability risks

In the "2026 Financial Stability Report" published by the Bundesbank, it was stated that although the German financial system maintains its current resilience, it operates in the shadow of geopolitical tensions.

The report emphasized that excessive valuations in financial markets, rising credit risks and vulnerabilities in real estate financing are the main threats. Attention was also drawn to the high public debt and the increasing weight of private loans provided by actors outside the traditional banking sector.

Pressure on companies and non-performing loans are increasing

The report stated that the financial pressure on the corporate sector is increasing. The report predicts that weak profitability, rising financing costs and an increase in bankruptcies may lead to more loan defaults. It is noted that monthly company bankruptcies in the country have recently reached their highest level since 2014, and the rate of non-performing loans has been on an upward trend since the middle of last year.

The report stated that the German banking sector maintains its high profitability thanks to strong interest income and that its capital and liquidity positions are solid, and warned that a possible deterioration in the macrofinancial environment could put the sector under pressure.

Non-bank financial institutions and risks in the real estate market

The report stated that risks in non-bank financial intermediaries, especially investment funds, are growing.

The report stated that capital outflows from German open-ended real estate funds have accelerated since mid-2023, and some funds had to suspend or restrict repayments, and noted that these forced sales may further strain the commercial real estate market.

The report pointed out that the bonds of funds with each other and with traditional financial institutions are becoming increasingly tight, and warned that possible losses and liquidity shortages could spread rapidly among sectors.

The report, which also includes concerns about the real estate market, stated that the demand for office spaces has decreased due to the trend of remote working and the commercial real estate market continues to remain under pressure.

The report emphasized that it is worrying that in the housing market, nearly 40 percent of new home purchases in Germany are financed almost entirely by loans.

"We are going through difficult times and this process will continue"

In his assessment of the issue, Bundesbank Board Member Michael Theurer said, "We are going through challenging times and this process will continue. Therefore, we need sufficient resilience, truly usable capital buffers, reliable data and a macroprudential framework that keeps pace with developments, including the risks of an increasingly digital financial world." he said.

Stating that asset valuations in financial markets remain at "ambitious" levels, especially in the US technology sector, Theurer stated that stocks and corporate bonds are overvalued and risk premiums remain low. Theurer noted that this situation makes markets vulnerable to negative surprises.

Theurer warned that there may be sharp declines in the markets if high profit expectations are not met or geopolitical tensions escalate, saying, "The downside potential is quite high." made his assessment.

Pointing out that the capacity of systemically important banks to absorb losses may be challenged due to their low risk weights and limited capital buffers, Theurer emphasized that it is essential to simplify the regulatory framework and increase the effectiveness of capital buffers.

Pointing out that the risks related to the high amount of government bonds in the balance sheets of banks in Europe continue, Theurer stated that effective rules are needed, such as imposing additional capital requirements on high concentrations in individual countries or applying concentration limits, so that banks can diversify their public debt risks.

"The combination of high and ever-increasing public debt and low economic growth continues to have a toxic effect," Theurer said. he said.

Stating that banks will be at great risk if debtors experience payment difficulties due to reasons such as unemployment, Theurer said, "The increase in the share of financing with high debt ratios may increase systemic risks by making the banking system more fragile against such developments." he warned.