Priya Patel
TLDR:
– German regulator, BaFin, is urging banks to set aside their recent bumper profits in preparation for potential bad news in the future
– The banking industry experienced high profits in 2023 due to central bank interest rate hikes and low deposit rates
– Although the shock of rate increases has been “digested in the banking books,” BaFin warns that difficulties for clients may still arise in the real estate and real economy sectors
– The regulator advises banks to be cautious and set aside funds to cover future costs and potential defaults on loans
– Branson, head of BaFin, suggests that insolvencies may begin to rise again after a period of low interest rates and increased government stimulus, and banks should prepare for credit losses in their books.
Key elements:
– The banking industry enjoyed a windfall in 2023 due to central bank interest rate hikes while keeping deposit rates low
– Central banks around the world have tightened monetary policy in recent years, but the focus has now shifted to when rates will be cut again
– The impact of rising borrowing rates on households and businesses has yet to be fully felt
– BaFin warns that difficulties for clients in the real estate and real economy sectors may still arise
– Banks should set aside funds to deal with potential defaults on loans and cover future costs
– Insolvencies are expected to rise as the euro zone economy faces a prolonged slump
– Banks should invest in operational security and stability, including protection against cyberattacks
– Bank profitability may not continue to rise after a successful 2023, and banks should carefully consider provisions for the future.
