The Financial Stability Board – made up of officials from the BaFin supervisor, the Finance Ministry, and the Bundesbank national central bank – said banks must start creating a capital buffer from this July amid ongoing concerns over Germany’s financial future. Regulators are on edge over a weakened manufacturing sector in Europe’s biggest carmaker with regulators seeing “no concrete signs of acute risks for financial stability” in Germany, according to Deputy Finance Minister Joerg Kukies. Felix Hufeld, president of Germany’s BaFin banking watchdog, said financial firms will have 12 months to get the extra provisions in place, which are being seen as precautionary. The financial authorities are responding to recent growth in lending in Germany that has outstripped the pace of expansion in the economy as a whole.
The provisions are aimed at preventing banks from sharply reining in their lending during a downturn.
It comes after Germany’s manufacturing sector fell further into recession in May, suggesting the economy is still far off from warming up again after stalling under pressure from the US-China trade war.
Beijing is the most important trading partner to Berlin outside the European Union, meaning Germany is sensitive to any developments in the nation’s standoff with Washington.
A weakening car industry has also dented manufacturing, with slowing global demand and tighter regulations surrounding automobile emissions impacting the sector.
IHS Markit’s flash Purchasing Managers’ Index revealed manufacturing had dropped to 44.3 from the 44.4 in April.
Germany narrowly avoided slipping into recession this year as it returned to growth in January to March following a turbulent end to 2018.
Gross domestic product (GDP) rose 0.4 percent quarter-on-quarter and 0.7 percent year-on-year calendar-adjusted, preliminary figures from the Statistics Office showed last week.
It means the German economy avoided slipping into the red, after recording a contraction of 0.2 percent for July to September last year and zero growth for October to December.
A recession is defined as two or more consecutive quarters of contraction.
The Finance Ministry said Germany’s banks should be able to meet the requirements for the financial buffer “predominantly from existing surplus capital”.
The Deutsche Kreditwirtschaft (DK) industry group said in a statement: “Today’s decision by the Financial Stability Board to activate the countercyclical capital buffer within one year comes at an inopportune time and is met with incomprehension in the German banking industry.”
The DK industry group noted that German banks had passed stress tests that simulated an unexpected economic slump together with rising loan defaults.
The DK, which groups Germany’s banking associations, said: “Serious risks to financial stability are currently not to be found.
“In addition, German banks have increased their capital resources following the financial crisis as a result of the stricter regulations and are significantly more stable than before.”
Last month, economy minister Peter Altmaier lowered the German growth forecast for 2019 to 0.5 percent.
This is down from an already lowered estimate of 1.0 percent, while initial GDP growth expectations for this year were once as high as 1.8 percent.
However, the German government is insisting momentum is expected to pick up in 2020 where growth of 1.5 percent is expected.