From CNBC:

German banks are warned to provision for potential loan defaults as the impact of higher interest rates hits the economy. While the banking industry enjoyed high profits in 2023, regulators are cautioning that challenges lie ahead, and insolvencies are expected to increase due to the impact of high borrowing rates.

Despite the resilience of many economies in the face of rising interest rates, policymakers are warning that the full impact on households and businesses has yet to be felt. The anticipated increase in insolvencies and credit losses will necessitate banks to provision carefully for potential defaults as profitability may not continue to rise after a strong 2023.

The Eurozone economy is projected to enter a recession, with Germany expected to face a prolonged slump. Despite this outlook, many banks have yet to meaningfully increase their loan loss provisions, and they should be prepared for more difficult times ahead. The figures for insolvencies have been artificially low due to previous periods of low interest rates and government stimulus.

Insolvencies are expected to rise due to a rapid incline in interest rates, leading to potential credit losses for banks. As a result, it is crucial for banks to be cautious and proactive in preparing for the challenges that lie ahead, including investing in operational security and stability.

As interest rates continue to remain historically high, German banks have been advised to set aside profits to prepare for the impact of higher interest rates on their clients. The head of Germany’s Federal Financial Supervisory Authority has warned that insolvencies are likely to increase due to the long period of low interest rates and fiscal stimulus, which have artificially kept figures low.

Deutsche Bank, Germany’s largest lender, exceeded third-quarter expectations with a 1.031 billion euro net profit. Despite this, the bank is being urged to prepare for potential defaults as insolvencies are projected to rise due to the impact of high interest rates on the economy.



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