By Christian van Beek, Director, Financial Institutions

Small German banks have had to book significant impairments on their mostly Held to Maturity securities portfolios because of rising interest rates but we see no risk of contagion following the closure of three US banks, despite continuing market volatility.

Attention has also focused on German banks’ deposit balances and liquidity positions, particularly the smaller banks of the Savings Banks Finance Group (SFG) and the Co-operative Financial Network (GFG), which have a structural deposit surplus hence correspondingly large securities portfolios. In total, securities write-downs at the savings banks were EUR 7.9bn and EUR 5.8bn at the co-operative banks.

We have no reason to believe that these banks are exposed to increased interest-rate or liquidity risks beyond revaluation effects. Not all savings banks were able to avoid net losses in 2022, but it is unlikely that they will run into financial distress. While smaller and weaker co-operative banks are regularly taken over, we do not expect the number of co-operative banks needing support to grow.

The supervisory and regulatory framework is well established and appropriate for the kinds of risks borne by these institutions. All institutions are required to report their risk capacity in a planned and adverse scenario to the German banking supervisor as part of the Internal Capital Adequacy Assessment Process (ICAAP). All major types of risk are covered. In addition to national supervision, the SFG and GFG have internal control mechanisms that we consider appropriate, particularly in relation to interest-rate and liquidity risk.

We do not expect an outflow of savings deposits in Germany as a result of the crisis in the US, though we have seen increased competitive pressure on savings deposits over the past six months. The banks benefit from a very granular and loyal customer base, backed by very strong and crisis-tested institutional protection schemes. All in all, this results in a stable deposit base. SFG and GFG have proven to be highly resilient in past crises and have shown little sensitivity to negative news flow.

In 2022, higher interest income from improved interest margins and significant provisions to the fund for general banking risks ensured a high degree of stability for the savings and co-operative banks. At the same time, a strong corporate sector in conjunction with a stable labour market in Germany have enabled the banks to contain risk costs, which has added to their stability. We do not expect the economic environment to worsen significantly over the course of 2023.

The level of asset impairments, while significant, has remained manageable at individual and group level. The aggregate Tier 1 Capital ratios remained almost unchanged at a reasonably high level at the end of 2022: 15.7% for the savings banks and 15.3% for the co-operative banks.

We expect banks' earnings to improve in 2023, both in terms of net interest income and net fee and commission income. We do not expect accelerated ECB rate rises in the second half of the year, so high valuation losses on securities will not recur in 2023 but actually represent a potential for recovery in the future.

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