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Frankfurt, Germany – German banks are entering a period of significant economic challenge from a position of relative strength, according to Mark Branson, President of BaFin, Germany's Federal Financial Supervisory Authority. However, Branson cautioned that uncertainty regarding the global economic outlook will remain exceptionally high in the coming months.

Speaking on Wednesday, Branson highlighted the robust capital buffers and overall financial health of German banks. Years of regulatory reforms and stringent stress tests have resulted in a sector that is well-prepared to weather potential shocks. “Our banks are, in general, well-capitalized and resilient,” Branson stated. “They have demonstrated their ability to absorb losses and continue lending to businesses and consumers.”

Despite this positive assessment, Branson emphasized the numerous headwinds facing the German economy and, by extension, its financial institutions. These include persistent inflation, rising interest rates, the ongoing war in Ukraine, and potential disruptions to global supply chains. The energy crisis continues to cast a long shadow, impacting businesses and household budgets alike.

“We are observing a complex and rapidly evolving situation,” Branson explained. “The combination of these factors creates a high degree of uncertainty, making it difficult to predict the future trajectory of the economy. We must remain vigilant and prepared for various scenarios.”

Key Concerns & BaFin's Response

BaFin is particularly focused on three key areas: firstly, the impact of rising interest rates on borrowers’ ability to repay loans; secondly, the potential for increased loan defaults among businesses struggling with higher energy costs and reduced demand; and thirdly, the risks associated with volatile financial markets.

To mitigate these risks, BaFin is intensifying its supervisory efforts, conducting more frequent and in-depth assessments of banks’ risk management practices. They are also closely monitoring banks' liquidity positions to ensure they have sufficient funds to meet their obligations. Branson stressed that BaFin is ready to act decisively if necessary to protect the stability of the financial system.

“Our role is to ensure that banks operate prudently and responsibly, and that they are prepared for all eventualities,” Branson concluded. “We will continue to work closely with banks and other stakeholders to navigate these challenging times and safeguard the financial well-being of Germany.”

The statement from BaFin comes at a crucial time for the German economy, as it grapples with the consequences of the energy crisis and the broader global economic slowdown. While the banking sector appears to be in a strong position, the persistent uncertainty underscores the need for continued vigilance and proactive risk management.