The dangers to the financial system have increased, warns the Bundesbank in its financial stability report. She is particularly critical of the situation with real estate funds.
The Bundesbank sees several sources of danger for the financial system, the financial stability report shows. Photo: IMAGO/greatif
Frankfurt. The Deutsche Bundesbank warns of increased risks to financial stability. Specifically, the central bank cites increasing credit risks, high valuations on the financial markets, risks in real estate financing, high national debt and the growing importance of private credit, i.e. the granting of loans by shadow banks. In several areas, the Bundesbank estimates the risks to be higher than last year.
“The risks to financial stability remain elevated,” said the responsible Bundesbank board member, Michael Theurer, at the presentation of the financial stability report on Thursday in Frankfurt. “The financial system must be prepared for future stress.”
A focus of the report is risks in commercial real estate. The vulnerabilities there remain “pronounced” and price declines could occur, according to the Bundesbank. This is due to possible interest rate increases and possible “selling pressure from the real estate fund sector”.
The risks have increased, particularly with funds. “The liquidity situation in the real estate fund sector is tense,” said the Bundesbank. “Since mid-2023, increasing amounts of funds have been flowing out of German open-ended real estate funds.” Individual funds would have had to suspend the redemption of shares or introduce restrictions on the redemption of shares. “Distressed sales could put additional strain on the commercial real estate market,” the financial stability report says.
The central bank is therefore significantly more concerned than last year. At the time, she had mentioned fire sales as a possible scenario, but saw fewer liquidity risks. These were “limited due to sufficient liquid assets to date as well as long minimum holding and notice periods,” it was said at the time.
At the end of October, the investment company DWS introduced drastic redemption restrictions for its largest open-ended real estate fund, “Grundimmobilien Europa”. Since then, investors have only been able to reclaim a maximum of ten percent of their shares in this product from the Deutsche Bank subsidiary. Smaller providers had already temporarily stopped redeeming shares in the spring, and two funds were even closed permanently.
The situation with real estate funds is one of several reasons why the Bundesbank sees increased risks from so-called shadow banks. Shadow banks are financial companies such as funds or insurers that offer bank-like products or services without being a bank. Central bankers like to call these “non-bank financial intermediaries”.
And in some areas the situation for such shadow banks has worsened. This does not only apply to the “tense” liquidity situation for real estate funds. For insurance companies, the Bundesbank observes at least “moderate risks from contract terminations and hidden liabilities”.
The Bundesbank views this with concern. “The increasing networking between banks, funds and insurance companies increases the risk that losses and liquidity needs will be transferred more quickly between the individual sectors,” warns the Bundesbank.
Private credit – which refers to credit funds that mostly finance small and medium-sized companies – is also “growing in importance as a possible contagion channel”. According to the Bundesbank, the networking of such providers with banks, insurers and pension funds is also increasing.
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