Daily Management Review

Bundesbank Urges Not To Take German Economic Race Lightly


11/29/2017


Low interest rates and positive economic environment in German could be taking attention of the “market participants” away from “rising risk”.



Starting from “weak banks” to the high prices of real estate, “a host of risks” seem to knocking at the door of German economy, while the Bundesbank draws the investors’ attention to the “vulnerabilities given the country’s eight-year economic run” which could go unnoticed.
 
Germany signifies the “biggest” economic hub of euro, whereby fuelling the engine to drive bloc on the path of “remarkable recovery” which the indicators pointed to “an ever-broader expansion” which was supported by “extraordinary” stimulus from the central bank. According to a “stability report” of the German Central Bank:
“There is a danger that low interest rates and the favorable economic conditions in Germany might cause market participants to underestimate risks”.
“Risks have built up, in particular, during the prolonged period of low interest rates -- the valuations of many investments are very high, and the share of low-interest investments on the balance sheets of banks and insurers has risen steadily.”
 
At present, the bank sector has strong footing to “cope with risks”. However, “low interest rates threaten their long term profitability”, as a result, it raises the “incentive” to take on “more risk” hoping to receive “higher returns”, thinks the Bundesbank.
 
While Reuters reported, as per the Bundesbank:
“Residential property prices may be 15 to 30 percent overvalued and while risks stemming from housing loans still appear to be limited, a reversal in house prices could have a ‘huge’”.
 
Nevertheless, the efficiency of German banks rank at the bottom among other European banks, as the “return on assets” feature at the “lowest in the bloc” while “cost to income ratio” marks the highest in the euro-zone at 74.9%. The report added further:
“This low level of profitability could increase the incentive to take on more risk in order to generate higher returns”.
 
While, the report added a note that “low interest rates” may continue for “an unexpectedly long period” which might “put pressure on small and medium-sized banks and life insurers in particular”.
 
 
References:
reuters.com







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