AI bubble and office vacancies: Bundesbank board warns of a toxic mix for banks

There are still doubts on the stock markets as to whether the AI ​​dreams will come true. However, other economic indicators don't look good either, complained Bundesbank board member Theurer. Banks would have to prepare for loan defaults.

Overheated stock markets, growing mountains of debt, problems with commercial real estate - the Bundesbank is warning of growing risks for Germany's banks. "The times are and will remain challenging," summarized Bundesbank board member Michael Theurer when presenting the central bank's latest financial stability report.

Valuations on the financial markets are “ambitious”, particularly in the US technology sector. If the high profit expectations are not fulfilled or geopolitical tensions worsen, prices could fall significantly. “The potential for setbacks is significant,” said Theurer.

The Bundesbank also sees increasing risks from high national debt in the euro area. “The mix of high, rising national debt and low economic growth remains toxic,” emphasized Theurer. If a country loses its creditworthiness, the risk premiums on its bonds rise. This puts a strain on banks, insurers and funds that hold these bonds.

Bankruptcies as high as in 2014

According to the Bundesbank, financial institutions must also expect more defaults on loans. The proportion of problem loans has increased since the middle of last year. Monthly insolvencies have recently climbed to their highest level since 2014, and higher financing costs are making the situation even more difficult for companies.

“Fortunately, so far the credit risks are materializing in an orderly manner. The banks can still cope with the burdens well,” said Theurer. "But the direction is clear: the ongoing economic weakness and the structural burdens on companies are increasingly having an impact on the banks."

The tense situation in the commercial real estate market, which has been tense for some time now, continues, and the Bundesbank continues to see increased risks that banks will have to accept losses. Because less office space is needed due to the home office trend, the market for such real estate is under pressure in many countries.

The Bundesbank is concerned that, according to the latest data, the purchase of residential property in Germany was almost entirely financed by loans, with almost 40 percent of the newly granted loan volume. If borrowers can no longer pay their installments in such cases, for example because they have become unemployed, the risk for the bank is much greater. “A large proportion of financing with a high proportion of debt capital makes the banking system more vulnerable to such developments and can therefore increase systemic risks,” warned Theurer.