Bundesbank Continues to See Elevated Financial Stability Risks
According to the Deutsche Bundesbank (German Federal Bank), the German financial system is resilient. However, it is operating in an environment of persistent geopolitical tensions. When presenting the 2026 Financial Stability Review, Michael Theurer, a member of the Executive Board of the Deutsche Bundesbank, highlighted in particular high financial market valuations, increasing credit risks, vulnerabilities in real estate financing, high levels of public debt and the growing importance of private credit.
In the Bundesbank’s assessment, advancing digitalisation poses additional threats. Artificial intelligence and hybrid threats may increase the risk of cyberattacks on critical financial services. In his opening statement at the presentation of the report, Theurer also explained that the conflict in the Middle East had been the principal factor weighing on economic development in 2026.
In the Bundesbank’s view, the following factors are particularly important for ensuring a stable financial system over the long term:
- Financial market participants must remain sufficiently resilient.
- Capital buffers must actually be available for use during periods of stress.
- Supervisory authorities and market participants depend on reliable data.
- The macroprudential framework must keep pace with the risks of an increasingly digitalised financial world.
High Valuations Increase Financial Market Vulnerability
Low Risk Premiums Coincide with High Earnings Expectations
According to the Bundesbank, valuations on international financial markets remain demanding. This applies particularly to the technology sector in the United States. Both equities and corporate bonds exhibit high valuations, while risk premiums remain low.
This combination increases the markets’ sensitivity to unexpected developments. If high earnings expectations are not met or geopolitical tensions intensify further, substantial price declines could occur. Such corrections could spread to other market segments and worsen financing conditions for companies. Theurer described the potential scale of such setbacks as considerable.
Public Debt Restricts Fiscal Headroom
Risks from Sovereign Exposures on Bank Balance Sheets
In numerous countries, high and further increasing debt levels coincide with weak economic growth and higher refinancing costs. At the same time, government spending is rising structurally, partly as a result of demographic change and higher defence expenditure. These factors may impair debt sustainability and restrict available fiscal headroom.
European banks continue to face risks arising from substantial sovereign exposures. In Theurer’s view, effective rules are required to encourage broader diversification of such exposures. He identified additional capital requirements for high concentrations involving individual sovereigns and concentration limits as possible instruments. He regarded the combination of high and further increasing public debt and low economic growth as a persistent problem.
Credit Risks in the German Banking Sector Are Increasing
Corporate Financing Comes Under Greater Pressure
The economic pressure on companies is increasing. Weaker earnings, higher financing costs and a growing number of insolvencies could lead to further credit defaults. According to the Bundesbank, the proportion of non-performing loans has increased since mid-2025.
A stress test conducted by the Bundesbank on structural risks also shows that German banks’ losses from corporate loans could increase significantly if structural pressures intensify further in particularly affected sectors of the economy. This applies especially to the automotive and chemical industries.
Sound Starting Position Does Not Rule Out Strains
The German banking sector’s earnings remain at a comparatively high level due to strong net interest income. The Bundesbank also considers institutions’ capital and liquidity positions to be sound. Nevertheless, a significant deterioration in the macro-financial environment could place the sector under pressure.
At systemically important banks, low risk weights and capital buffers with only limited usability may impair loss-absorbing capacity. Theurer emphasised that a buffer can fulfil its stabilising function only to a limited extent if banks cannot use it in full during a period of stress. In the Bundesbank’s assessment, a simpler regulatory framework and more effective capital buffers are therefore crucial.
Vulnerabilities in Residential Real Estate Financing
High Loan-to-Value Ratios in New Lending
The vulnerabilities that emerged in the German residential real estate market during the low-interest-rate period have decreased but, according to the Bundesbank, remain relevant. Data on newly granted residential mortgage loans also point to risks.
According to the Bundesbank press release, almost 40 per cent of new lending volume in the second quarter of 2026 related to financing arrangements in which the loan-to-value ratio exceeded 90 per cent. For just under 11 per cent of new lending volume, the loan amount even exceeded the value of the financed property.
According to Theurer, private households remain robust overall. However, high loan-to-value ratios may increase the potential loss in the event of a credit default. In addition, for a substantial proportion of newly granted residential mortgage loans, borrowers use a high share of their income to service their ongoing debt.
Strained Situation in Commercial Real Estate
Further Increase in Non-Performing Loans
Risks in the commercial real estate sector remain elevated. The number of non-performing loans has continued to rise, albeit less sharply than before. At the same time, transaction volumes in the commercial real estate market remain low.
The risk of further price declines persists. The Bundesbank identifies rising interest rates and selling pressure from the real estate fund sector as possible causes. Market conditions therefore remain strained.
Higher Risks among Funds and Other Non-Banks
Outflows from Open-Ended Real Estate Funds
German open-ended real estate funds have experienced increasing outflows since mid-2023. Some funds have had to suspend the redemption of units or introduce redemption restrictions. The Bundesbank considers the liquidity situation in this market segment to be strained.
Forced sales could place additional pressure on the commercial real estate market. This creates a risk that strains in the fund sector and adverse developments in the real estate market will reinforce one another.
Growing Interconnectedness May Intensify Contagion Effects
Funds are increasingly interconnected with one another and with banks, insurance companies and pension institutions. Losses and liquidity shortages may therefore spread more quickly between the various parts of the financial system.
A Bundesbank model calculation examines such contagion effects using a scenario modelled on market developments during the first days of the Iran conflict in March 2026. The scenario assumes significant stock market declines and an increase in volatility.
Internationally active private credit funds have also gained substantially in importance. Their links to the rest of the financial system have increased, while the Bundesbank considers the segment as a whole to have only limited transparency. Theurer therefore advocated improved European data exchange, more comprehensive reporting in less transparent areas such as private credit, and a flexible set of instruments for containing systemic liquidity risks in investment funds at an early stage.
Artificial Intelligence and Hybrid Threats
Cyber Risks to Critical Financial Services
As the financial system becomes more digitalised, additional dependencies on data, IT infrastructure and technical service providers are emerging. According to the Bundesbank, both the increasing use of artificial intelligence and hybrid threats may exacerbate the risk of cyberattacks on critical financial services.
This broadens the focus of financial stability beyond traditional market, credit and liquidity risks. The Bundesbank considers a macroprudential framework that also addresses the risks of an increasingly digitalised financial world to be necessary. According to Theurer, the financial system must be prepared for future stress.
Capital Buffers Are Intended to Safeguard Loss-Absorbing Capacity
Bundesbank Considers Existing Requirements Appropriate
According to the Bundesbank, banks, insurance companies and funds have generally coped well with the strains experienced to date. In view of rising credit risks, institutions’ loan-loss provisioning continues to be of considerable importance.
The countercyclical capital buffer and the sectoral systemic risk buffer for loans secured by residential real estate are intended to strengthen the banking system’s ability to absorb losses. In view of the challenging environment, the Bundesbank continues to consider the existing macroprudential capital buffer requirements appropriate.
According to the official decision of the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin, German Federal Financial Supervisory Authority), the countercyclical capital buffer amounts to 0.75 per cent. The credit-to-GDP gap calculated using the national methodology stood at minus 1.5 percentage points in the second quarter of 2026, resulting in a calculated buffer guide of zero per cent.
Following the decision of the Bundesanstalt für Finanzdienstleistungsaufsicht dated 30 April 2025, the sectoral systemic risk buffer for residential real estate loans amounts to one per cent; it had previously stood at two per cent. According to the Bundesanstalt, the countercyclical capital buffer and the sectoral systemic risk buffer provide the German banking system with total capital buffers of more than €20 billion.
Stability Risks Also Have Implications for Banking Law
The developments described by the Bundesbank affect, among other things, lending relationships, collateral, financing structures, regulatory capital requirements and the allocation of risk among financial market participants. Companies, investors and high-net-worth individuals can obtain an assessment of the associated legal issues through banking law advice from MTR Legal Rechtsanwälte.
Sources
- Deutsche Bundesbank Pressemitteilungen
- Deutsche Bundesbank: Pressemitteilung der Bundesbank
- BaFin: Entscheidung der Bundesanstalt für Finanzdienstleistungsaufsicht
- Deutsche Bundesbank: Eingangsstatement anlässlich der Vorstellung des Finanzstabilitätsberichts 2026 der Deutschen Bundesbank
- Statement on the publication of the Financial Stability Review 2026 of the Deutsche Bundesbank
- Deutsche Bundesbank: Im Livestream: Pressekonferenz zum Finanzstabilitätsbericht 2026
