Bundesbank warns financial stability risks remain elevated amid market, credit pressures - Anadolu Ajansı

Risks to Germany's financial stability remain elevated amid geopolitical tensions, high asset valuations and growing pressure on corporate borrowers, the country's central bank warned Thursday.

In its 2026 Financial Stability Report, the Bundesbank said the German financial system remained resilient but faced vulnerabilities stemming from property financing, rising government debt and the growing role of private credit.

The bank also warned that artificial intelligence and hybrid threats were heightening the risk of cyberattacks targeting critical financial services.

Presenting the report in Frankfurt, Bundesbank Executive Board member Michael Theurer stressed that financial institutions needed sufficient resilience, usable capital buffers and reliable data to withstand further shocks.

He warned that elevated stock and corporate bond valuations, coupled with low risk premiums, left markets vulnerable to sudden shifts in investor sentiment that could trigger disorderly price declines.

Mounting pressure on German companies was increasingly affecting banks, with monthly corporate insolvencies reaching their highest level since 2014.

Higher financing costs were compounding the difficulties, particularly for businesses refinancing loans taken out when interest rates were low.

Theurer said banks had so far absorbed the deterioration, but prolonged economic weakness and structural challenges were increasingly weighing on their balance sheets.

German banks continued to benefit from strong net interest income and maintained solid capital and liquidity positions. However, a sharp deterioration in economic and financial conditions could put the sector under pressure.

The Bundesbank also highlighted risks in housing finance, noting that nearly 40% of new housing loan volume in the second quarter involved borrowing exceeding 90% of the property's value.

Almost 11% involved loans exceeding the value of the property being financed.

Risks in commercial real estate also remained elevated, with potential interest rate increases and selling pressure from property funds threatening further price declines.

Outflows from German open-ended property funds have increased since mid-2023, prompting some funds to suspend or restrict redemptions. Forced property sales could add further pressure to the commercial real estate market.

Theurer also called for measures to reduce banks' concentrated exposure to individual governments, including additional capital requirements or concentration limits.

He urged policymakers to simplify financial regulations without undermining banks' resilience and to make capital buffers more accessible during periods of stress.

Stronger data sharing and oversight of investment funds and private credit were also needed to prevent risks from spreading across the financial system.