Major banks in Germany should increase provisions for non-performing loans due to growing corporate insolvencies and credit risks, according to Claudia Buch, Vice-President of the Bundesbank. The German economy, facing increased downward pressure from a collapse in construction and described by some as the “sick man of Europe,” is dealing with a technical recession.

The economic challenges are compounded by a rapid rise in interest rates across the euro zone, as the European Central Bank increased its main deposit facility from -0.5% in September 2019 to 4% in September 2023. Buch highlighted that while the financial sector has handled the interest rate increase well, the full effects are yet to be visible on banks’ balance sheets. She emphasized the importance of resilience for banks in the current environment, urging them to use their current profitability to increase capital, liquidity, and investments in IT to shield against cyber risks.

Despite a strong third quarter for German banks, with Deutsche Bank reporting a net profit of €1.031 billion ($1.13 billion) and Commerzbank more than tripling its net profit, provisions for non-performing loans did not increase substantially, according to Buch. She noted that provisioning is still at a relatively low level compared to historical averages.

With the uncertain economic environment and the likelihood of increased corporate insolvencies and credit risks, both the macro-prudential and micro-prudential sides urge banks to be aware of these risks and increase their resilience. Buch emphasized the need for sufficient capital and liquidity, as well as investments in IT to mitigate cyber risks in the face of an uncertain economic landscape.

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