The Deutsche Bundesbank is Germany’s independent central bank. As such, it is part of the Eurosystem, the monetary authority of the eurozone, which comprises the European Central Bank (ECB) and the national banks of countries whose currency is the euro. Helping to set and implement Eurosystem monetary policy is the Bundesbank’s core function, but it performs other key tasks, such as supervising Germany’s credit institutions, maintaining financial stability and overseeing the country’s payment systems.
Professor Joachim Wuermeling is the Bundesbank’s executive board member responsible for banking and financial supervision, a task which is shared with Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), the federal supervisory authority. He is also a member of the German Financial Stability Committee set up by the Federal Ministry of Finance.
“While BaFin is responsible for carrying out the relevant sovereign functions, such as issuing legal acts, the Bundesbank is responsible for analytical research and fieldwork, which involves on-site inspections of banks and most of the operational aspects of supervision,” he explains.
The Bundesbank’s supervisory responsibilities have an international dimension too, and Mr Wuermeling represents the Bundesbank in the ECB’s Supervisory Board and in the Basel Committee on Banking Supervision.
“More generally, the Bundesbank takes a broad view and contributes deep insights into fields, such as macroeconomic developments and financial stability,” says Mr Wuermeling.
Impact of war
Russia’s invasion of Ukraine is one of his chief areas of concern, though he is quick to point out that German banks’ direct exposures to Russia, Ukraine and Belarus are limited.
What matters more here are the potential second- or third-round effects of the war and the sanctions, which are extremely difficult to gauge
“What matters more here are the potential second- or third-round effects of the war and the sanctions, which are extremely difficult to gauge,” he explains. “The most severe scenario would certainly be a ban on Russian gas. Nevertheless, and overall, banks should be able to cope as they hold sufficient excess capital.
“What has certainly increased is the risk of cyber-attacks, and we have to stay vigilant when it comes to banks’ cyber resilience,” he adds. “Regarding sanctions, they are being strictly observed as far as we can see; banks are putting a lot of effort into complying with them.”
Other big challenges for German banks are profitability — despite the strong recovery from the effects of the pandemic in recent months — and interest rate risk. Recent years have seen not just the big German banks, but the entire sector deeply restructure their business models. Banks have significantly cut costs and raised revenues. “Nevertheless, German banks still very much depend on interest income and operate in a highly competitive environment,” says Mr Wuermeling.
Helpful hikes
Rising interest rates may help. Although, at first, a hike would put a burden on banks and squeeze their margins, it would help them to stabilise their profits, as it would mean no more negative interest on money parked with central banks and interest margins may widen.
“Our analyses suggest that around 90% of banks would see positive effects in the second year after a rise in interest rates. Still, high inflation and a weaker economy might drive up defaults of households and corporates,” he says.
Germany’s annual inflation rate was 7.9% in May, its highest since 1981. As part of the Eurosystem, the Bundesbank plays a part in setting the single monetary policy of the euro area, the primary objective being to maintain price stability.
“The rise in inflation concerns us, of course, and calls for a monetary response,” he says. “But monetary policy measures only take full effect with a time lag. They cannot alleviate the burdens that people are currently facing, especially due to higher energy prices. Selective intervention by fiscal policy can provide targeted relief for low-income households. The federal government has already launched relief packages.”
The continued digitalisation of banking has the potential to improve financial stability, and many of the Bundesbank’s regulatory and supervisory measures are supportive of such developments. At the same time, it needs to make sure that new digital risks are kept in check without stifling innovation.
“Digitalisation can make supervision more effective, too,” says Mr Wuermeling. “The Bundesbank has launched several projects to harness the benefits of new technologies as a way of improving our analyses and decision-making.”
