One thing that has been proven beyond a shadow of a doubt is that the German economy is in the middle of a slowdown and industrial growth has been tepid over the past few months. In addition to that, the country’s relatively robust banking industry has also been going through a bit of churn, and that has now led the banking authorities in Europe’s largest economy to ask the banks to set aside as much as $5.8 billion in case of a slump. In addition to that, it is important to note that the property market in Germany is also thought to be overvalued and coupled with a slowing economy, it poses a significant danger to banks who are heavily invested in the real estate market.
The advice was provided by the country’s banking authorities comprising of members of the Financial Stability Board. The member of the board includes officials from the Bundesbank (central bank of Germany), the BaFin and the German Finance Ministry. The head of the banking regulator BaFin, Felix Hufeld, stated that banks will be given a period of 12 months within which they will have to set aside the required funds. Many experts in Germany believe that banks’ volume of lending is untenable when one considers the growth of the economy, and hence, there is a danger of a bubble. The buffer funds will come in handy if there is a downturn. During economic slumps or a banking crash, banks stop lending completely, but if it does have the buffer funds, then it could continue lending and propping up the economy.
However, many stakeholders are not amused at the board’s decision and feel that it is a case of too little too late, considering the fact that the economy had been in a slowdown for quite some time. Deutsche Kreditwirtschaft, one of the leading industry bodies in the country, said as much. In a statement, it said,
Today’s decision by the Financial Stability Board to activate the countercyclical capital buffer within one year comes at an inopportune time and is met with incomprehension in the German banking industry.
