Don’t ignore rising risk in German economy, Bundesbank warns

FRANKFURT (Reuters) – Germany’s economy is facing a host of risks — from high real estate prices to weak banks — but investors may be ignoring vulnerabilities given the country’s eight-year economic run, the Bundesbank said on Wednesday.

Germany, the euro zone’s biggest economy, has been the engine of the bloc’s remarkable recovery, with indicators pointing to an ever-broader expansion helped by extraordinary central bank stimulus.

“There is a danger that low interest rates and the favorable economic conditions in Germany might cause market participants to underestimate risks,” the German central bank said in a regular stability report.

“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.”

The bank sector is currently strong and able to cope with risks but low interest rates threaten their long term profitability, raising the incentive for them to take on more risk in hope of higher returns, the Bundesbank added.

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” impact on banks, it said.

German banks are among the least efficient in Europe, with their return on assets among the lowest in the bloc and their cost to income ratio at 74.9 percent, the highest in the euro zone.

“This low level of profitability could increase the incentive to take on more risk in order to generate higher returns,” the report said, noting that an unexpectedly long period of low interest rates will continue to put pressure on small and medium-sized banks and life insurers in particular.

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