Credit risk in banks has not yet undergone a fundamental assessment

According to a report published on Thursday, the central bank of Germany is estimating a downturn but no serious correction in the property market of the country, even with warnings of overvaluation.

Vice president of the Bundesbank, Claudia Buch told CNBC’s Joumanna Bercetche: “We are seeing a turndown in the price growth for residential real estate, but it’s not that the overall dynamic has reversed, so we still have overvaluations in the market.”

The increase in residential property prices from 2010 to mid-2022 and overvaluations in the market has increased in German cities and towns ranging from 15% to 40% and throughout the country in 2021.

Analysts have predicted an acute decline for the sector, including at Deutsche Bank. Housing prices have already reduced by around 5% since March, according to forecasts by Jochen Moebert, a macroeconomic analyst at the German lender house prices will fall between 20% to 25% in total from peak to trough variation.

Buch said that the extent to which the easing of credit criteria brought on by a very rapid rise in residential mortgage credit raised concerns for the central bank.

“There we also see a slowdown, so we don’t currently think that additional measures are taken to slow down the build-up of vulnerabilities in this market segment, but we do think the market need to keep monitoring because we know that private households are extremely exposed to mortgage loans, being  the biggest component in private household debt,” said Buch.

Additionally, Buch said that households are less exposed to increasing interest rates than in some other countries because the market has the highest share of fixed-rate mortgages.

Buch said, “Of course, the risk doesn’t disappear, it’s still in the system, but this exposure to interest rate risk is large with the financial sector, the banks who’ve done that lending concerning mortgages.”

And also other issues have been highlighted in the Financial Stability Review for 2022 by the Bundesbank, such as the declining macroeconomic environment, the downturn in German economic activity, rising energy prices, and the decline in real disposable income.

It reports that the German economy has reached a “turning point” as a result of financial market price corrections that have caused portfolios of assets to be written down. Additionally, the lists rising collateral requirements for futures trading as well as rising dangers associated with business loans.

Despite the fact that the credit risk in banks has not yet undergone a fundamental assessment, it claims that its financial system is “susceptible to adverse developments.”

Buch said that it is clear that we need a financial system that is strong enough to keep building up resilience over the next time.

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