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Bundesbank Financial Stability Review highlights risks to economy

FXStreet (London) - In its Financial Stability Review, the Bundesbank has highlighted key areas where it believes low rates are driving investors to take greater risk in the hunt for yield. It also highlights risk of over-leverage in the property market.

- “The currently low interest rates, along with low volatility in the markets, are prompting an intensified search for yield. There is a danger that investors may be willing to take greater risks. Although searching for a higher yield represents normal investor behaviour, such behaviour can become problematical and jeopardise the functioning of the financial system if investors fail to maintain adequate risk buffers.”

- “Ensuring that banks have an adequate capital base makes a key contribution to the stability of the financial system. In addition, it must be assured that investment decisions are not distorted by regulations or by implicit government guarantees.”

- “Enterprises are increasingly tapping non-bank funding sources, which suggests that structural adjustments are occurring in the German financial system. For instance, firms are now obtaining funding by borrowing from non-banks and have recently stepped up their bond issuance.”

- “In addition, small and medium-sized enterprises (SMEs), in particular, have been increasingly retaining their earnings, thereby strengthening their capital base, in some cases significantly. For one thing, this improves the ability to finance innovation; for another, equity is a better buffer against shocks than debt as equity investors participate directly in an enterprise’s profits and losses.”

- “The broader the investor base, the more potential losses are spread over a larger number of shoulders.”

- “The Bundesbank’s analyses show very few signs of procyclical behaviour by banks or of a destabilising nexus between mortgage lending and property prices. However, it is striking that, in the towns and cities under consideration with sharply rising housing prices, a large share of mortgages have a German sustainable loan-to-value ratio (Beleihungsauslauf*) of over 100%. This points to structural vulnerabilities in the German banking system tourban real estate market risks.”

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