Almost 1 in 20 small German banks fail national stress test

Almost 5% of small and medium-sized German banks missed regulatory capital requirements in a stress test conducted by Germany’s two top financial watchdogs.The impact of the simulation carried out by the Bundesbank and BaFin would have been higher if the stress test had factored in contagion effects, Bundesbank board member Andreas Dombret said at a press conference in Frankfurt. He presented the results of the survey of about 1,500 banks together with Raimund Roeseler, executive director for banking supervision at BaFin.“The stress test shows that the banks should very carefully assess how well they are prepared to cope with the risks” identified in the survey, Dombret said. “The message of our survey and our stress test to banks and savings banks is: those who want to safeguard vitality in the long run should make preparations.”German banks have long suffered from comparatively low profitability in a fragmented market that has been exacerbated by low — and sometimes negative — interest rates. The banks said in the survey that they expect their profit before tax to fall by 9% over the next five years.The stress test applied by the financial watchdogs simulated different scenarios, including market risks, credit risks, and what would happen to bank balance sheets if the European Central Bank changed interest rates. Under a stress scenario, 68 of the surveyed banks would fall under the capital requirements set by regulators.“We know who those 68 banks are and that’s why we’re quite relaxed sitting here,” Roeseler said.Regulators also asked banks to answer questions about residential real estate lending standards and how a potential drop in housing prices would affect banks’ capital. Residential property prices have risen around 50% since 2010, while credit growth at small and medium-sized institutions has been around 5%.“We currently do not see a real estate bubble, but we do see a willingness among financial institutions to take higher risks,” Dombret said. “That’s an area where we need to be especially vigilant.”The Bundesbank board member pointed out one potential hurdle in assessing those risks, stating that he had only “limited satisfaction” with the granularity of mortgage data provided by smaller banks.“In comparison to other countries in the euro area, our direct neighbours, we have significantly less granular data,” he said.