## 1deuea2022003

## Source details

**Canonical URL:** [1deuea2022003](https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2022/english/1deuea2022003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2022/english/1deuea2022003.pdf.json)

---

### Executive summary — overall assessment and structural vulnerabilities
- Financial sector has "weathered the impact of the Covid pandemic and the war in Ukraine relatively well so far, but risks remain elevated."
- Supportive factors: "High pre-crisis capital and liquidity buffers, strong public and private sector balance sheets, and unprecedented ECB support and fiscal measures" kept NPLs low.
- War in Ukraine expected to "exert a material drag on GDP growth through higher energy prices, tighter financial conditions, and elevated uncertainty, as well as disruptions in supply chains, including energy supply"; "inflation is expected to spike to above 7 percent in 2022."
- Two structural vulnerabilities from 2016 FSAP remain: "low bank profitability and misalignments in the residential real estate prices."
- Rising interest rates may further squeeze banks’ interest margins in the short-to-near term due to "the growing duration mismatch between assets (mortgages) and liabilities (customer deposits)."
- "Residential real estate price overvaluation and higher tail risks since the onset of the pandemic suggest potential pockets of vulnerabilities in banks’ exposures to real estate."
- Progress: "The FSAP welcomes progress towards closing residential real estate data gaps to support risk monitoring and calibration of macroprudential tools, but more is needed for closing gaps on lending standards."

### Stress test results, scenarios, and liquidity assessment
- Main systemic risk drivers: "a global resurgence of COVID-19 with extended supply chain disruptions, a scarcity of gas and oil, and de-anchoring of inflation expectations in the U.S. and advanced Europe."
- Adverse scenario macro outcomes and assumptions:
  - V-shape trough of 13.4 percent decline in real GDP relative to the baseline by 2024 (3 standard deviations from the baseline over two years).
  - Cumulative real GDP growth decline is 7.4 percent between 2022 and 2024.
  - House prices decline by 23 percent and stock prices decline by 29 percent by 2024.
  - Unemployment increases by 6.6 percentage points above the baseline and remains 0.8 percentage points above the baseline at the end of the projection horizon.
- Solvency stress test results:
  - SIs: aggregate CET1 capital ratio depletes by 5.2 percentage points by 2023 from 14 percent under the adverse scenario; three banks fall below the 8.25 percent hurdle rate in 2022-23 but remain above the minimum CET1 ratio; aggregate capital shortfall is 0.3 percent of GDP.
  - LSIs: under the adverse scenario about 20 banks (comprising about 3 percent of total LSIs’ assets) fall below the hurdle rate; under the baseline 8-9 very small banks (up to 1.6 percent of total LSIs assets) fall below the hurdle.
  - Coverage: solvency tests covered about 83 percent of the banking system’s assets.
- Liquidity stress testing and metrics:
  - Weighted average LCR stands at about 160 percent.
  - Vast majority of banks have liquidity in excess of the regulatory minimum of 100 percent and NSFR of 100 percent.
  - Less than 5 percent of banks in the sample would become illiquid within a 1-month horizon; about 15 percent (all small LSIs) become illiquid at the 3-month horizon.
  - Shortfalls at 1-month and 3-month horizons are less than 0.1 percent and 0.5 percent, respectively, of the LSI sample’s assets.
  - Under severe stress, selected banks might require access to the central bank’s U.S. dollar swap line; U.S. dollar exposures pose FX liquidity risk for some LSIs.

### Macroprudential policy, borrower-based tools, and residential real estate risks
- Current stance: "Macroprudential policy is being tightened."
- Specific measures: announced increases in the CCyB of 0.75 percent by Q1 of 2023 and sectoral systemic risk buffers (SSyRB) were deemed well timed and coordinated.
- RRE dynamics and PaR findings:
  - Overall RRE prices grew 10.3 percent in 2021; house prices increased by 91 percent nominally and 63 percent in real terms between 2010-21.
  - Price-to-rent deviation: 21 percent; price-to-income deviation: 37 percent (as of end-2021).
  - Econometric model suggests RRE overvaluation of 10-15 percent as of 2021Q3; Bundesbank estimates 20-35 percent overall, with city overvaluation 15-40 percent in 2021.
  - Under an adverse scenario, RRE prices could fall by some 14 percent (cumulative) over 3 years (PaR 5th percentile, annualized growth rates).
  - CRE PaR: 5 percent chance of a 30 percent cumulative fall over 3 years.
- Data gaps undermining monitoring:
  - Lack of comprehensive borrower-based information (e.g., LTV, DSTI) and incomplete transaction data at regional level hinder monitoring and policy calibration.
  - Under FinStabDEV, in 2023 Bundesbank will begin collecting housing loan data from commercial lenders including LTV, amortization, and borrowers’ ability to service debt.
- Macroprudential recommendations:
  - Enhance powers over legislated but yet-to-be-activated loan-to-value and amortization instruments; rapidly introduce powers to set debt-to-income and debt service limits.
  - Strengthen guidance to banks on residential real estate lending standards and develop a communication strategy to support activation of borrower-based measures.
  - Close data gaps on lending standards to monitor existing and evolving risks.
  - Use discretionary CCyB flexibility to allow material reduction in event of stress.

### Microprudential oversight, BaFin reforms, and supervisory recommendations
- Progress since 2016: "Good progress had been made in strengthening the microprudential frameworks for banking and insurance since the 2016 FSAP."
  - BaFin reorganization program in response to Wirecard strengthens legal and structural powers and expanded capacities.
  - ECB/SSM SREP approach rolled out to all LSIs in 2020; enhanced liquidity and operational risk frameworks.
- Remaining issues and recommendations:
  - Streamline current reporting to the MoF to strengthen BaFin’s operational independence.
  - Enhance strategic coordination between BaFin and the Bundesbank via a joint strategic agenda, shared data, systems, and tools.
  - Align corporate governance frameworks with international best practices (e.g., strengthen supervisory board oversight and direct reporting lines for internal audit, compliance, and risk).
  - Reassess reliance on external auditors and enhance supervisors’ capacity for deep file reviews.
  - Reassess frequency and scope of on-site inspections and supervisory engagement; strengthen resources to ensure satisfactory coverage.
  - Step up fintech data collection, forward-looking dynamic market monitoring, and related financial stability analysis.

### Deposit Guarantee Schemes (DGS), Institutional Protection Schemes (IPS), and resolution planning
- Assessment: "The system of Deposit Guarantee Schemes (DGS)/Institutional Protection Schemes (IPS) needs reform."
- Key features and concerns:
  - Almost all banks are members of voluntary DGS or IPSs, offering protection levels well above peers; multiplicity of schemes and high protection levels imply high cost per failed bank to its scheme.
  - Schemes’ target financial resources in some cases only equal to the EU minimum; access to backstop liquidity is limited to uncommitted or ad-hoc borrowing arrangements.
- Recommendations:
  - Adopt a single mandatory deposit guarantee scheme, established as a public body and with a robust government-backed liquidity backstop to facilitate greater risk pooling and diversification.
  - Address systemic risk associated with IPSs in recovery and resolution planning; ensure robust planning for IPS financial distress, including consolidated recovery and resolution planning; promote review of EU legislation if necessary.
  - Strengthen IPS governance and plan for an ex-ante fund (proposal noted: 0.5 percent of RWAs for S-Group IPS).

### Financial Market Infrastructure — Clearstream Banking AG Frankfurt (CBF)
- Overall: "CBF is underpinned by a solid legal basis and comprehensive and robust frameworks for managing risk."
- Key metrics: as of end-2020, market value of outstanding securities in collective safe custody EUR 8.6 billion; served 286 participants of which 110 were foreign.
- PFMI observance: 20 of 21 relevant principles in observance and 1 in broad observance.
- Governance weaknesses and recommendations:
  - Internal control functions (risk management, internal audit, compliance) are the responsibility of a single Executive Board member; CEO concurrently Chief Operating Officer and Chief Risk Officer.
  - Chair of the Risk Committee is CRO of ultimate parent (not independent).
  - Recommendations: separate internal audit from risk management and compliance at EB level; appoint an independent member as Chair of the Risk Committee; conduct periodic independent reviews of Supervisory Board performance.
  - Risk management enhancements: broaden client identification criteria for direct participants by including system-level thresholds; implement direct monitoring of indirect participant risks; implement ex-ante monitoring of collateral concentration limit breaches.

### Climate transition risks and insurance sector implications
- FSAP found small vulnerabilities from climate transition risks to the banking system; "Consistent with the authorities’ findings, the FSAP found small vulnerabilities from climate transition risks to the banking system."
- CGE model (IMF-ENV) simulations:
  - Reaching 2030 emissions target implies carbon pricing of USD320 per ton by 2030.
  - GDP impacts by 2030 depend on use of carbon tax revenues:
    - If used to lower the wage tax, GDP estimated to decline by one percent by 2030 vs BAU.
    - If used for lump-sum rebate, GDP would decline by 1.6 percent.
    - If used to pay off government debt, GDP would decline in next five years then recover.
- Banks’ expected credit losses under mitigation policy:
  - Expected losses will rise slightly but remain small at around 0.05 percent of total loans by 2030.
  - Landesbanken and development banks most affected; savings and cooperative banks least affected.
- Supervisory recommendations:
  - Continue to expand authorities’ and banks’ capacity for assessing climate risks and encourage climate-related disclosures.
  - Consider conducting supervisory climate stress tests for LSIs.
  - ECB is already conducting stress testing on SIs; FSAP recommends BaFin expand stress test work to cover LSIs.

### Insurance sector vulnerabilities and supervisory reforms
- Low-interest rate effects:
  - Guarantees on some policies as high as four percent.
  - Weighted average years to maturity of German life insurers’ liabilities at end-2020: 26.3 years.
  - Zinszusatzreserve (ZZR) used since 2011 to reflect cost of guarantees in low-rate environment.
- EIOPA 2021 stress test: market shocks are main vulnerabilities; Solvency II transitional provisions and management actions enable adequate solvency to be maintained; liquidity not a major vulnerability.
- Recommendations:
  - Strengthen and simplify solvency framework; consider impact of extreme interest-increase scenarios on ZZR funding.
  - Strengthen liquidity risk management reporting and stress testing requirements.
  - Streamline internal model approval and reporting requirements.
  - Strengthen BaFin’s contingency and resolution powers for insurers; extend recovery and resolution planning and powers to require contingency plans for internationally active insurance groups.
  - Reassess frequency of on-site inspections and enhance management reporting for supervisors.

### Financial integrity (AML/CFT) and other supervisory areas
- Reforms since 2016:
  - BaFin increased AML/CFT supervisory resources and onsite inspection activity.
  - Transparency Register introduced in 2017, due to be fully operational by end-2022.
  - Germany comprehensively assessed ML/TF risks in 2019 and regulates virtual asset service providers.
- Remaining issues and recommendations:
  - Continue strengthening AML/CFT efforts and supervision, increase remedial actions and sanctions to improve suspicious transaction reporting.
  - Continue to increase coverage and accuracy of beneficial ownership information.
  - Note: Germany’s AML/CFT framework to be assessed under the FATF methodology in June 2022.

### Data gaps, monitoring, and key numeric context
- Key numeric context and background data points:
  - "Public debt had fallen to 59 percent of GDP in 2019."
  - "Germany's economy contracted by 4.6 percent in 2020."
  - Gross impact of the war in Ukraine estimated at about 2.5 percent of GDP in 2022 for Germany (about 0.5 percent to be offset by fiscal relief measures), resulting in projected GDP growth at about 1.5 percent.
  - Inflation projection: "above 7 percent" in 2022.
  - Macroprudential calibration: "countercyclical capital buffer (CCyB) of 0.75 percent by Q1 of 2023."
- Banking sector size and structure:
  - Banking system assets equivalent to over 260 percent of GDP at end-2021; banking system accounts for about 60 percent of the financial sector.
  - In 2021, Germany had one global systemically important bank, Deutsche Bank.
  - Non-banking financial sector represents about 40 percent of the financial sector.
- Credit and real estate metrics (selected):
  - Bank credit to private NFCs rose 5.3 percent real y-o-y in 2021.
  - Housing mortgages grew 7.3 percent y-o-y in September 2021; housing loan growth 7.3 percent in 2021Q3.
  - Outstanding bank loans for house purchases were 46 percent of GDP in 2021Q3.
  - German MFIs’ housing loans were 53 percent of loans to domestic enterprises and households (18 percent of assets) in 2021Q3.
  - Lending to CRE sector constituted about 19 percent of loans to domestic enterprises and households (6.4 percent of assets) in 2021Q3.
  - Provisioning coverage remains at about 35 percent.
  - Selected aggregate banking indicators (all banks): Tier 1 Capital Ratio to RWA 16.8; Total Capital Ratio (CAR) to RWA 18.8; Liquid assets to total assets 26.1; Liquid assets to short term liabilities 170.9; ROE 3.9; ROA 0.4; Interest margin to gross income 40.7; Noninterest expenses to gross income 65.6; NPL to gross loans 1.4; NPL net of provisions to capital 7.0; Provisions to NPLs 35.4.

### Interconnectedness, contagion, and contagion simulation findings
- Contagion simulation setup:
  - Simulations assume all banks fail one at a time and measure cascade of defaults via interbank exposures; contagion index and amplification index constructed from 1,317 simulations.
  - Simulation parameters: Simulations 2, 5 and 8 assume 20 percent, 50 percent and 80 percent loss given default and haircuts on marketable securities respectively.
- Main findings:
  - Interbank contagion risks flow from SIs to LSIs and from LSIs as a group to SIs.
  - Interbank market appears segmented; failure of a SI (respectively LSI) generates limited direct contagion risks to other SIs (respectively other LSIs).
  - A small number of banks account for most contagion losses; credit cooperatives, savings banks, Landesbanken, and commercial banks are significantly exposed to contagion risks.
  - Both first-round and higher-round losses matter, with second and further rounds more important as shock severity increases.

### Selected policy recommendations and timing highlights
- Immediate (I):
  - Strengthen BaFin’s operational independence and strategic cooperation between BaFin and Bundesbank.
  - Take steps to strengthen the solvency framework for insurers.
- Near Term (NT):
  - Set microprudential Pillar II guidance buffers for large SIs as needed.
  - Strengthen monitoring of larger LSIs with significant FX (USD) exposures.
  - Conduct top-down interest-rate risk stress tests and expand LSIs interest rate risk monitoring.
  - Expand analytical capacity for climate risks and consider supervisory climate stress tests for LSIs.
  - Enhance powers over borrower-based instruments and rapidly introduce debt-to-income and debt service powers.
  - Strengthen guidance on residential real estate lending standards and develop communication strategy for borrower-based measures.
  - Establish a single mandatory DGS as a public body with a robust backstop liquidity line; ensure robust planning for IPS distress.
- Medium Term (MT):
  - Align corporate governance frameworks with international best practices and provide additional supervisory guidelines.
  - Broaden Clearstream’s client identification criteria by including system-level thresholds.
  - Continue closing data gaps (e.g., FinStabDEV data collection in 2023) to improve monitoring of lending standards and real estate risks.

*International Monetary Fund — Germany: Financial Sector Assessment Program (FSAP) — content unit 1deuea2022003.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### Overall assessment
- The financial sector has "weathered the impact of the Covid pandemic and the war in Ukraine relatively well so far, but risks remain elevated."
- Key supportive factors: "High pre-crisis capital and liquidity buffers, strong public and private sector balance sheets, and unprecedented ECB support and fiscal measures" helped keep nonperforming loans (NPLs) low.
- The war in Ukraine is expected to "exert a material drag on GDP growth through higher energy prices, tighter financial conditions, and elevated uncertainty, as well as disruptions in supply chains, including energy supply"; "inflation is expected to spike to above 7 percent in 2022."

### Structural vulnerabilities identified
- Two structural vulnerabilities from the 2016 FSAP remain: "low bank profitability and misalignments in the residential real estate prices."
- Rising interest rates may further squeeze banks’ interest margins in the short-to-near term due to "the growing duration mismatch between assets (mortgages) and liabilities (customer deposits)."
- "Residential real estate price overvaluation and higher tail risks since the onset of the pandemic suggest potential pockets of vulnerabilities in banks’ exposures to real estate."
- Progress noted: "The FSAP welcomes progress towards closing residential real estate data gaps to support risk monitoring and calibration of macroprudential tools, but more is needed for closing gaps on lending standards."

### Stress test results and liquidity assessment
- "The FSAP solvency stress tests show that the significant institutions (SIs) and less significant institutions (LSIs) are overall resilient to an adverse scenario."
- Main systemic risk drivers: "a global resurgence of COVID-19 with extended supply chain disruptions, a scarcity of gas and oil, and de-anchoring of inflation expectations in the U.S. and advanced Europe."
- Under the FSAP’s V-shaped adverse scenario:
  - For SIs: "the capitalization levels of three banks fall below the 8.25 percent hurdle rate in 2022-23 but remain above the minimum common equity tier 1 (CET1) ratio."
  - For LSIs: "LSIs’ aggregate capital levels remain high under the adverse scenario, with the capital of 20 small banks (comprising 3 percent of total LSIs’ assets) falling below the hurdle rate."
- Liquidity: "The analysis also portrays a banking system that appears generally resilient to liquidity stress. Under severely stressed conditions, some banks might require access to the central bank’s U.S. dollar swap line."
- Recommended supervisory actions to preserve robustness:
  - "continued close monitoring of large SIs’ prudential ratios,"
  - "establishing microprudential buffers (Pillar 2 guidance) for less-capitalized banks as needed,"
  - "strengthening LSIs’ interest rate risk monitoring and conducting top-down stress tests for interest rate risks,"
  - "continuing the close monitoring of larger LSIs with significant foreign exchange exposures."

### Climate transition risks
- "Consistent with the authorities’ findings, the FSAP found small vulnerabilities from climate transition risks to the banking system."
- Recommendations:
  - "Continue to expand their and banks’ capacity for assessing climate risks and encourage climate-related disclosures in the financial sector."
  - "Conducting supervisory climate stress tests for LSIs could be considered."

### Macroprudential policy and borrower-based tools
- Current stance: "Macroprudential policy is being tightened."
- Specific measures and timing: "The announced increases in the countercyclical capital buffer (CCyB) of 0.75 percent by Q1 of 2023 and sectoral systemic risk buffers (SSyRB) were well timed and coordinated across the financial stability agencies."
- Remaining needs and recommendations:
  - "Complementary measures are needed and factors delaying the activation of borrower-based tools (e.g., legal and data gaps) need to be addressed."
  - "Enhancing powers over the legislated, but yet-to-be activated, loan-to-value and amortization instruments to facilitate their effective use, and the rapid introduction of additional powers to set debt-to-income and debt service limits."
  - "Strengthen current guidance to banks on residential real estate lending standards, and develop a communication strategy to support the activation of borrower-based measures."
  - "Close data gaps on lending standards to monitor existing and evolving risks."

### Microprudential oversight and regulatory reforms
- Progress since 2016: "Good progress had been made in strengthening the microprudential frameworks for banking and insurance since the 2016 FSAP."
  - Responses to idiosyncratic bank distress included a "BaFin reorganization program with several legal and structural reforms."
  - "The authorities fully rolled out the ECB/Single Supervisory Mechanism (SSM) approach to the Supervisory Review and Evaluation Program to all LSIs in 2020 and enhanced the frameworks for liquidity and operational risks."
- Further recommended reforms:
  - "Streamline the current reporting to the MoF to strengthen BaFin’s operational independence;"
  - "Enhance strategic coordination between BaFin and the Bundesbank, the legal framework and approach to corporate governance, and certain aspects of the overall supervisory framework (e.g., the frequency of onsite inspections for banks and insurers and the role of external auditors)."
  - "Further strengthen and simplify the solvency framework and BaFin’s contingency and resolution powers for insurers."
  - "Step up efforts on fintech data collection, forward looking dynamic market monitoring, and related financial stability analysis."

### Deposit guarantee schemes, IPS, and resolution planning
- Assessment: "The system of Deposit Guarantee Schemes (DGS)/Institutional Protection Schemes (IPS) needs reform."
- Rationale: Reform should be "informed by a review of the distortions resulting from depositors’ high level of protection guaranteed under the current regime."
- Progress: "There has been significant progress since the 2016 FSAP on resolution planning and preparedness, with resolution powers broadly in line with best practice and internal resolution processes well developed."
- Recommendations:
  - "Adoption of a single mandatory deposit guarantee scheme, established as a public body and with a robust government-backed liquidity backstop. This would facilitate greater risk pooling and diversification."
  - "Address the systemic risk associated with IPS in their recovery and resolution planning work."
  - "Ensure robust planning for financial distress of IPSs, including planning for recovery and resolution at a consolidated level, promoting review of EU legislation if necessary."

### Financial market infrastructure: Clearstream Banking AG Frankfurt (CBF)
- Overall: "Clearstream Banking AG Frankfurt (CBF) is underpinned by a solid legal basis and comprehensive and robust frameworks for managing risk."
- Recommendations to further enhance practices:
  - "Strengthening the independence of internal control functions at the level of the Executive Board and appointing an independent member as Chair of the Risk Committee."
  - "Broaden Clearstream’s explicit identification criteria for clients of direct participants by including system-level thresholds."

### Key numeric context and background data points
- "Public debt had fallen to 59 percent of GDP in 2019."
- "Germany's economy contracted by 4.6 percent in 2020."
- The "gross impact of the war in Ukraine is estimated at about 2.5 percent of GDP in 2022 (with about 0.5 percent to be offset by fiscal relief measures) for Germany, resulting in a projected GDP growth at about 1.5 percent."
- Inflation projection: "above 7 percent" in 2022.
- Macroprudential calibration noted: "countercyclical capital buffer (CCyB) of 0.75 percent by Q1 of 2023."
- Hurdle rate treatment: "For SIs and LSIs, the hurdle rate includes the minimum CET1 ratio, the conservation buffer and the CCyB starting in 2023. A systemic risk buffer of 0.5 percent of RWAs is also added to the hurdle rate of SIs."

### Selected policy recommendations (timing highlights)
- Immediate (I): strengthen BaFin’s operational independence and strategic cooperation between BaFin and Bundesbank; take steps to strengthen the solvency framework for insurers.
- Near Term (NT): set microprudential Pillar II guidance buffers for large SIs as needed; strengthen monitoring of larger LSIs with significant FX (USD) exposures; conduct top-down interest-rate risk stress tests; expand analytical capacity for climate risks and consider supervisory climate stress tests for LSIs; enhance powers over borrower-based instruments and rapidly introduce debt-to-income and debt service powers; strengthen guidance on residential real estate lending standards; initiate communication strategy for borrower-based measures; establish a single mandatory DGS as a public body with a robust backstop liquidity line; ensure robust planning for IPS distress.
- Medium Term (MT): align corporate governance frameworks with international best practices and provide additional supervisory guidelines; broaden Clearstream’s client identification criteria by including system-level thresholds.

_International Monetary Fund — Germany: Executive Summary (FSAP)_

### 11.      Credit growth and easy liquidity conditions supported the recovery in 2021, but

### 11.      Credit growth and easy liquidity conditions supported the recovery in 2021, but

### Credit conditions and recent tightening
- In 2020, most banks tightened lending standards, but interest and lending rates remained low reflecting accommodative monetary policy.
- Bank credit to private NFCs rose 5.3 percent in real terms year-on-year (y -o-y) in 2021, supported by an increase in deposits.
- Over half of the credit increase was driven by savings and cooperative banks.
- Housing mortgages grew 7.3 percent y-o-y in September 2021.
- In 2022, financial conditions started to tighten:
  - 10-year Bund yields rose 100 basis points.
  - Longer-maturity loans and deposits rates increased (with some lag).
  - New mortgage and nonfinancial corporates’ loans rose by 0.3-0.6 percentage points since end-December 2021.

### Corporate indebtedness, cash buffers, and insolvencies
- By end-2020, debt at risk—the total debt of listed firms with an interest coverage ratio (ICR) below one as a percentage of the total debt of all listed firms—rose to 16 percent (up from 4 percent at the end-2019).
- The Bundesbank’s analysis suggests zombification remained broadly stable at about 6 percent of all NFCs over the past decade.
- Corporate insolvencies fell for the 12th year in a row in 2021 to the lowest level since the adoption of the 1999 Insolvency Act, despite the May 2021 full reinstatement of the obligation to file insolvencies after its 14-month full or partial suspension.
- Extensive SME support programs and other measures (shifting assistance from loans to grants, easier access to short-time work under the Kurzarbeit program, reimbursement of social security contributions to employers) helped avert widespread bankruptcies.
- Earnings before interest and taxes (EBIT) divided by interest expenses defines the ICR.

### Residential and commercial real estate dynamics and risks
- CRE prices declined by 0.8 percent in 2021, with significant heterogeneity across property types.
- Overall RRE prices grew 10.3 percent in 2021, and 8.2 percent in the largest seven cities.
- House prices increased by 91 percent in nominal terms and 63 percent in real terms between 2010-21.
- RRE price growth reached 10.7 percent (5 percent) y/y in 2021Q4 in nominal (real) terms.
- Standard indicators as of end-2021 suggest:
  - Price-to-rent ratio deviation from long-run averages: 21 percent.
  - Price-to-income ratio deviation from long-run averages: 37 percent.
- An econometric model suggests RRE overvaluation of 10-15 percent as of 2021Q3; Bundesbank estimates suggest overall overvaluation in RRE prices of 20-35 percent, with city overvaluation in the range of 15-40 percent in 2021.
- In 2021Q3:
  - Outstanding bank loans for house purchases were 46 percent of GDP and about half of total loans to domestic enterprises and households.
  - Housing loan growth reached 7.3 percent in 2021Q3.
  - Loans to CRE sectors decelerated marginally to 6.4 percent year-on-year from the peak of 8.3 percent in early 2019.
  - German MFIs’ housing loans were 53 percent of loans to domestic enterprises and households (18 percent of assets).
  - Lending to CRE sector constituted about 19 percent of loans to domestic enterprises and households (6.4 percent of assets).
- Tail risk assessment (price-at-risk) findings as of 2021Q3 versus end-2019:
  - Probability of negative real price growth one year ahead increased to 2.2 percent for RRE (from 0.7 percent at end-2019).
  - Probability of negative real price growth one year ahead increased to 66 percent for CRE (from 24 percent at end-2019).
  - There is a 5 percent chance that RRE prices could fall by 14 percent under severe adverse scenarios in real cumulative terms over the medium-term.
  - There is a 5 percent chance that CRE prices could fall by 30 percent under severe adverse scenarios in real cumulative terms over the medium-term.
- Immediate CRE sector risks stem from sub-sectors (e.g., non-food retail and potentially hotel businesses), particularly given COVID-19 outlook uncertainty and rising interest rates with higher inflationary pressures.
- Lack of comprehensive borrower-based information (e.g., loan-to-value (LTV), debt-service-to-income (DSTI)) may lead to underestimation of risks.

### Financial sector landscape and structure
- Banking system assets equivalent to over 260 percent of GDP at end-2021; the banking system accounts for about 60 percent of the financial sector.
- In December 2021, commercial and saving banks and credit cooperatives held over two-thirds of banking system assets.
- Germany’s three pillars: Pillar 1 commercial banks; Pillar 2 public banks (Landesbanken and Sparkassen); Pillar 3 cooperative banks.
- LSIs and SIs are not fully independent but benefit from institutional protection schemes (IPSs); most private banks are members of a voluntary top-up DGS.
- At the Euro Area level, Germany accounts for a fourth and 55 percent of EA bank and LSI assets, respectively.
- In 2021, Germany had one global systemically important bank, Deutsche Bank.
- Non-banking financial sector represents about 40 percent of the financial sector.
- At end-2020, there were about 1,000 insurance companies, of which 388 were supervised by BaFin; the remaining approximately 600 insurers are supervised by the Federal State (Bundesland) authorities.
- The German insurance market includes about 127 mutual companies.
- Non-banking activities such as asset management are expanding; Brexit prompted a re-allocation of several financial services to group entities in Germany.
- Examples of fintech scale in the text:
  - One of the largest neobanks had a balance sheet of less than EUR 4.5 billion as of end-2020.
  - Crypto assets and licensed crypto-asset custodians had about EUR 3 billion under custody at the beginning of 2022.

### Bank soundness, capital, provisioning, and interconnections
- Banks’ capital buffers strengthened since the last FSAP; provisioning for NPLs remains low.
- Provisioning coverage remains at about 35 percent.
- Net foreign position in foreign exchange (FX) to capital increased to 4.4 percent in 2021 from 3.4 percent in 2020 (after recording 4 percent in 2016).
- Bank NPLs are low and have declined since the last FSAP.
- The banking sector is interconnected domestically and internationally; a relatively small number of banks account for a large share of interconnections.
- SIs, savings banks, and credit cooperatives’ lending accounts for over 90 percent of the total exposure of the domestic banking sector; the 21 SIs account for close to half of the total exposures.
- Household deposits account for the bulk of banks’ liabilities; non-financial corporates are largely funded by banks.
- Insurance companies and pension funds have reduced their positions with banks and slightly increased their exposures to investment funds.
- German banks’ total foreign exposure (as percent of total assets) is moderate compared to peer countries; exposures are predominantly to the U.K., France, and North America.
- German banks’ exposures are higher against U.S. NBFIs and U.K. banks relative to peers; U.K. banks have comparably larger claims on German banks than peer countries.
- More than half of the bank claims of France, Netherlands, and Italy on Germany relate to Germany’s non-bank private sector.

### Systemic risk assessment — profitability and vulnerabilities
- Low bank profitability remains a persistent source of vulnerability.
- Aggregate profitability indicators:
  - All banks: Tier 1 Capital Ratio to RWA 16.8; Total Capital Ratio (CAR) to RWA 18.8; Liquid assets to total assets 26.1; Liquid assets to short term liabilities 170.9; ROE 3.9; ROA 0.4; Interest margin to gross income 40.7; Noninterest expenses to gross income 65.6; NPL to gross loans 1.4; NPL net of provisions to capital 7.0; Provisions to NPLs 35.4.
  - Commercial Banks: Tier 1 17.4; CAR 20.1; Liquid assets to total assets 39.5; Liquid assets to short term liabilities 160.9; ROE 4.4; ROA 0.4; Interest margin to gross income 34.9; Noninterest expenses to gross income 71.4; NPL to gross loans 1.8; NPL net of provisions to capital 8.3; Provisions to NPLs 37.9.
  - Landesbanken: Tier 1 15.9; CAR 20.0; Liquid assets to total assets 24.3; Liquid assets to short term liabilities 152.6; ROE 3.8; ROA 0.3; Interest margin to gross income 39.4; Noninterest expenses to gross income 62.3; NPL to gross loans 0.9; NPL net of provisions to capital 6.1; Provisions to NPLs 37.4.
  - Saving Banks: Tier 1 15.7; CAR 16.7; Liquid assets to total assets 12.6; Liquid assets to short term liabilities 174.4; ROE 3.1; ROA 0.5; Interest margin to gross income 54.9; Noninterest expenses to gross income 63.0; NPL to gross loans 1.2; NPL net of provisions to capital 6.0; Provisions to NPLs 33.7.
  - Regional institutions of credit cooperatives: Tier 1 19.5; CAR 21.1; Liquid assets to total assets 27.9; Liquid assets to short term liabilities 171.3; ROE 7.4; ROA 0.6; Interest margin to gross income 21.1; Noninterest expenses to gross income 56.1; NPL to gross loans 1.0; NPL net of provisions to capital 6.2; Provisions to NPLs 43.4.
  - Other cooperative banks: Tier 1 15.0; CAR 16.5; Liquid assets to total assets 11.0; Liquid assets to short term liabilities 166.8; ROE 3.7; ROA 0.5; Interest margin to gross income 61.9; Noninterest expenses to gross income 59.4; NPL to gross loans 1.4; NPL net of provisions to capital 7.0; Provisions to NPLs 29.5.
  - Real estate and mortgage banks: Tier 1 20.1; CAR 25.0; Liquid assets to total assets 9.0; Liquid assets to short term liabilities 222.3; ROE 4.4; ROA 0.1; Interest margin to gross income 76.8; Noninterest expenses to gross income 69.8; NPL to gross loans 0.9; NPL net of provisions to capital 12.4; Provisions to NPLs 26.0.
- Cyclical and structural factors weighing on profitability include low-interest rates, constraints on fee and commission income, preference for savings over asset management products, strong bank competition, substantial staff base, and dense branch networks.
- Rising interest rates may squeeze banks’ interest margins over the short-to-near term due to duration mismatch between assets (mortgages) and liabilities (customer deposits); cooperatives and savings banks are likely to be more affected than commercial banks.
- Other risks to profitability: low economic growth, underestimation of credit risk, competitive pressures from fintech and non-banks, slow IT innovation, and cyber risks.
- Reportedly conservative collateral valuations provide some mitigation for real estate exposure risks.

*1deuea2022003 - 11.*

### 23.      Further closing data gaps including on lending standards are needed to monitor

### 23.      Further closing data gaps including on lending standards are needed to monitor

### Data gaps and residential real estate (RRE) price measurement
- In 2023, under the Financial Stability Data Collection Regulation (FinStabDEV), the Bundesbank will begin collecting data on housing loans to private households from all commercial lenders, including on LTV ratios and information on the amortization period and borrowers’ ability to service debt.
- A time series of lending standards to assess evolution over time should be helpful in informing policy decisions.
- Buoyant developments in the RRE market call for further data gaps closures to help identify and mitigate tail risk events.
- Data on transaction prices in the residential real estate markets need improvement, particularly at the regional level, to help improve data quality of the official RRE price indices.
- Note on regional indices: For calculation of regional real estate price indices, the Federal Statistical Office relies on transaction data from committees of surveyors for property values, which is currently provided in an incomplete form and with a time delay; such limitations complicate calculations of official real estate price statistics, particularly for rural areas, making these estimates highly susceptible to revisions and reducing their usefulness for analytical purposes.

### Residential and commercial property Price-at-Risk (PaR) findings
- Residential property PaR analysis points to increased tail risks in 2021Q3 compared to pre-pandemic at end-2019.
- Under an adverse scenario, RRE prices could fall by some 14 percent (in cumulative terms) over 3 years.
- Commercial property PaR models also suggest increased tail risks in 2021Q3 compared to pre-pandemic at end-2019.
- Under an adverse scenario, CRE prices could fall by 30 percent (in cumulative terms) over 3 years.
- Methodological notes:
  - PaR estimates are based on parametric, t-skew density fitted over quantile regression estimates for 2021:Q3 and 2019:Q4; figures are annualized growth rates.
  - Two- and three-year-ahead estimates are shown at the 5th percentile (compounded growth rates).
  - The RRE adverse scenario is calibrated as a simultaneous 2 standard deviations shock to leverage (change in household debt-to-GDP, interest payments-to-disposable income), affordability measure (house price-to-gdp per capita ratio (misalignment)), and financial conditions index.
  - The CRE adverse scenario is calibrated as a simultaneous 2 standard deviations shock to employment.

### Macro-financial risks and the adverse scenario used in stress testing
- Key adverse scenario drivers (RAM: Table 6) include:
  - An escalation of the war that could be associated with a Russian gas shut off and higher commodity prices.
  - A global resurgence of COVID-19 with extended supply chain disruptions.
  - De-anchoring of inflation expectations in the U.S. and advanced Europe, leading to rising core yields and risk premia.
- Specific risk channels highlighted:
  - De-anchoring of inflation expectations in the U.S. and/or advanced European economies due to worsening supply-demand imbalances, rising energy prices, and higher nominal wage growth, leading to rising core yields and risk premia.
  - Global resurgence of COVID-19 with extended supply chain disruptions that could cause greater scarring, pressure on capital buffers and margins, credit tightening, an increase of zombie corporates, a wave of bankruptcies and higher NPLs.
- Adverse scenario macro outcomes and assumptions:
  - The adverse scenario results in a V-shape trough of 13.4 percent decline in real GDP relative to the baseline by 2024 (3 standard deviations from the baseline over two years, Figure 11).
  - The cumulative real GDP growth decline is 7.4 percent between 2022 and 2024.
  - The scenario assumes the output gap closes in 2025 and involves stagflation and monetary tightening followed by monetary policy loosening associated with a drop in demand.
  - House prices decline by 23 percent and stock prices decline by 29 percent by 2024.
  - Unemployment increases by 6.6 percentage points above the baseline and remains 0.8 percentage points above the baseline at the end of the projection horizon.
  - The adverse scenario is more severe than the EBA 2021 stress test scenarios and qualitatively different from the EU-wide 2021 exercises, particularly regarding the monetary policy path.

### Bank solvency stress testing: coverage, scenarios, and results
- Coverage and approach:
  - The FSAP banking solvency stress tests covered about 83 percent of the banking system’s assets and included banks of different sizes and business models.
  - Two separate stress tests were conducted using the same macroeconomic scenario and risk parameters—one for SIs drawing on ECB supervisory data, and the other for LSIs using Bundesbank supervisory data.
  - The FSAP assessed banks’ resilience to (i) credit risk related to non-financial corporates, households, and sovereigns; (ii) interest rate and other market risks, particularly foreign exchange and sovereign risks, equity prices, and real estate prices; (iii) other income channels subject to modeling constraints and data availability.
  - Interest rate risks could only be tested for SIs due to different supervisory reporting for SIs and LSIs.
- SI (significant institutions) results:
  - Under the baseline scenario, SIs’ aggregate capitalization remains high, driven by net income and a decline of credit risk despite some moderate near-term losses caused by the interest rate increase.
  - Under the adverse scenario, the aggregate common tier equity (CET1) capital ratio of SIs depletes by 5.2 percentage points by 2023 from 14 percent and increases in subsequent years.
  - Three banks fall below the hurdle rate in 2022-23, but capitalization remains above the minimum CET1 ratio and the aggregate capital shortfall remains small at 0.3 percent of GDP.
  - Drivers of capital depletion include strong funding shocks, a sharp recession, higher RWAs, interest rate risk, market risk, and to a lesser extent credit risk.
  - Assumption note: analysis assumes shocks to policy rates are fully passed through to funding costs of banks; the FSAP net interest income satellite model implies pass-through from deposit rates to lending rates is smaller than one.
- LSI (less significant institutions) results:
  - Thanks to high overall capitalization, aggregate capital remains high under the adverse scenario.
  - Under the baseline scenario, 8-9 very small banks (accounting for up to 1.6 percent of total LSIs assets) fall below the hurdle rate.
  - Under the adverse scenario, about 20 banks (accounting for about 3 percent of total LSI assets) fall below the hurdle rate.
  - Recapitalization needs are small.

### Bank liquidity stress testing: buffers and resilience
- Key liquidity metrics:
  - The weighted average liquidity coverage ratio (LCR) stands at about 160 percent.
  - The vast majority of banks have liquidity well in excess of the regulatory minimum of 100 percent and in excess of the NSFR of 100 percent.
  - Other indicators (deposit-to-loan ratio and ratio of liquid assets to total assets) also suggest ample liquidity in the system as a whole.
  - Counter-balancing capacity (CBC) is robust and tilted to the highest quality assets, especially for SIs.
- Stress test outcomes:
  - The FSAP stress tests confirm that the banking system appears to be resilient to liquidity shocks, especially at the conventional liquidity stress test horizon.
  - Less than 5 percent of banks in the sample would become illiquid within a 1-month horizon.
  - About 15 percent of banks (all small LSIs) would become illiquid at the 3-month horizon.
  - Shortfalls at these horizons are less than 0.1 percent and 0.5 percent, respectively, of the LSI sample’s assets and would be manageable.
  - Even at the 1-year horizon, shortfalls under the severe adverse scenario would be comparatively small, and IPS schemes (whose support is not considered in the tests) could provide a second line of defense.
  - In the LSI sample, cooperatives and savings banks account for additional shortfalls in the 3-month to 1-year horizons in the most adverse stress scenarios.
- FX liquidity risk:
  - Under a severe adverse scenario, selected banks’ U.S. dollar exposures could pose a risk, emphasizing the importance of existing swap lines among central banks.
  - Only a few banks rely on the capacity to convert euro-denominated assets into U.S. dollars rapidly and at a low cost.
  - In the unlikely event of a disruption of access to U.S. dollar liquidity, a few banks with inadequate U.S. dollar liquidity buffers could face challenges under stressed conditions even within a few days.
  - Continued close monitoring of larger LSIs with significant foreign exchange exposures is warranted.

### Interconnectedness analysis and contagion
- Contagion simulation setup and metrics:
  - Simulations assume all banks fail one at a time and characterize the cascade of defaults in the interbank market due to credit and funding shocks.
  - The contagion index measures the sum of losses in percent of the capital of all banks or groups of banks resulting from all or a subset of the 1317 simulations.
  - The amplification index is the ratio of second and further rounds of losses to the losses incurred during the first round of contagion.
- Main findings:
  - Interbank contagion risks flow from SIs to LSIs and from LSIs as a group to SIs.
  - Contagion risks are much less among LSIs and among SIs individually; the interbank market may be segmented among SIs and LSIs implying that failure of a SI (respectively LSI) generates limited direct contagion risks to other SIs (respectively other LSIs).
  - The interbank market is concentrated, with a few large banks accounting for a significant share of interbank lending volumes; a small number of banks account for most contagion losses.
  - While first-round losses tend to dominate, as severity of shocks increases the second and other rounds account for a higher share of total losses, especially when a small bank is the trigger bank.
  - Both SIs and LSIs are impacted by contagion losses as a share of their capital.
  - Under the FSAP model’s hypothetical assumptions, credit cooperatives, savings banks, Landesbanken, and commercial banks are significantly exposed to contagion risks in the interbank market; the FSAP does not assess the likelihood that these risks would materialize.
- Simulation parameters note:
  - Simulations 2, 5 and 8 respectively assume a 20 percent, 50 percent and 80 percent loss given default and haircuts on marketable securities in the contagion risk simulation.

*Source: IMF staff estimates and calculations; Bundesbank and ECB supervisory data as presented in the FSAP chapter.*

### 33.      The FSAP makes several recommendations to address pockets of vulnerabilities in the

### 1deuea2022003 - 33.      The FSAP makes several recommendations to address pockets of vulnerabilities in the

### Banking system vulnerabilities and FSAP recommendations
- Stress test results: overall banking system appears fairly resilient to severe shocks, but high uncertainty around scenarios and future recovery paths (including uncertainties around the war-in-Ukraine) warrant caution and some policy strengthening.
- FSAP recommends authorities:
  - continue to closely monitor banks’ prudential ratios, particularly large SI commercial banks, and establish microprudential buffers (Pillar 2 guidance) for less capitalized banks as needed;
  - strengthen LSIs interest rate risk monitoring, including by gathering data on the remaining maturity of retail deposits, wholesale funding, and interest-bearing assets to perform top-down interest rate stress tests;
  - strengthen data sharing between the Bundesbank and the ECB; and
  - continue to strengthen risk monitoring and analysis of domestic and cross-border interconnectedness, focusing on key domestic interbank market institutions and other markets where exposures are located, as needed.

### Corporate sector: pandemic impact, sensitivity analysis, and stress tests
- Pandemic effects and counterfactual sensitivity analysis:
  - Pre-pandemic share of firms at risk: 23 percent.
  - Without support measures and even if listed firms cut production costs, share of firms at risk would have increased to 60 percent.
  - Debt-at-risk would have surged from 4 percent to 41 percent (Figure 19 referenced).
  - 38 percent of firms (up from 26 percent pre-pandemic) would have been unable to maintain positive cash balances without new borrowing.
  - More than 5 percent of firms could have ended up with equity below zero, from none in the pre-pandemic period.
- Sector table (selected entries preserved exactly as in source):
  - Agriculture (2) 0.1-315
  - Air transport (2) 2.2-53-62
  - Amusement and Recreation (6) 0.1-55-61
  - Business services (46) 2.5-74
  - Communication (3) 7.1-28
  - Construction 1.6-19-12
  - Electricity, gas, water supply (8) 7.8-224
  - Hotels & restaurants (1) 0.0-4514
  - Manufacturing (145) 60.2-19-10
  - Mining excluding oil (3) 0.2-13-38
  - Other private services (7) 0.3-11-36
  - Social, health, education services (5) 3.0-42
  - Transportation excl. air transport (6) 5.2-21-8
  - Wholesale & retail trade (19) 9.8-11-9
  - Total (263 listed companies) 100-17-8
  - Source: Datastream, Capital IQ and IMF Staff estimates
  - Note on shock to listed companies' sales: Difference between analysts' January 2020 and June 2020 sales forecasts for individual firms for 2020.
- Solvency stress test adverse scenario (based on end-2020 firm-level data):
  - Debt-at-risk would increase by six percentage points to 16 percent of total debt of listed NFCs (equivalent to about 2 percent of assets of banks in Germany).
  - Probability of default would increase by six basis points to 1.19 percent by 2023.
  - The share of debt in firms with an ICR<1 starts to rise in 2023 under the adverse scenario.
  - Coverage note: For Germany, the sample NFCs account for 54.1 percent of total debt.
  - Adverse scenario analysis covers only 2022-23; growth in 2020-21 is identical under baseline and adverse scenarios.

### Climate transition risks and macroeconomic simulations
- Model and assumptions:
  - Analysis used a global computational general equilibrium (CGE) model (the “IMF-ENV” model) with 25 regions and 37 sectors.
  - Simulations assume (i) other countries will meet their nationally determined contributions (NDCs), and (ii) carbon tax (or carbon pricing) is the instrument used to mitigate CO2 emissions.
  - Reaching the 2030 emissions target would imply carbon pricing of USD320 per ton by 2030 and would adversely affect GDP.
- Simulated GDP impacts depend on use of carbon tax revenues (Figure 21 referenced):
  - If used to lower the wage tax, GDP is estimated to decline by one percent by 2030 compared to the business-as-usual (BAU) scenario.
  - If used to provide a lump-sum rebate, GDP would decline by 1.6 percent because of the increase in workers’ wealth (and fall in labor supply).
  - If used to pay off government debt, GDP would decline the next five years led by the decline in household consumption (driven by higher energy prices) but would recover with improved budget balances and their positive effect on national saving and investment.
- Sector heterogeneity: CO2-intensive sectors (coal, oil, gas power generation, chemical and mining industries) are most affected; renewables (solar and wind) gain in value added.
- Modeling caveats noted in source:
  - Non-pricing measures could help achieve targets with a lower carbon price, but quantitative impact is uncertain.
  - Analysis does not consider costs associated with labor force reallocation from brown to green industries; carbon pricing is the only policy instrument modeled; behavioral parameters assumed identical between short- and long-run; no friction in labor market assumed.

### Banks’ expected credit losses under mitigation policy
- FSAP estimates:
  - Expected losses to banks under the mitigation policy will rise slightly over time, but would still remain small at around 0.05 percent of total loans by 2030.
- Heterogeneity across bank types:
  - Landesbanken and development banks are the most affected groups due mainly to large exposure to the power and transport sectors.
  - Savings banks and cooperative banks are the least affected due to larger exposure to less carbon intensive sectors (e.g., real estate, construction).
- Methodology note (as provided):
  - PD for each sector used coefficients estimated by the Bundesbank (PD_it = 0.664*PD_it−1 − 0.0509*ΔVA_it − 0.0267*ΔVA_it−1 − 0.0433*ΔEQPit; ΔVA and ΔEQP refer to rates of change in scenario; see Bundesbank 2022).
  - Expected loss aggregated by changes in PDs multiplied by LGD weighted by bank exposure; LGD by sector as of 2021Q3 provided by the Bundesbank.

### Authorities’ needs and supervisory recommendations on climate risks
- Survey evidence:
  - BaFin (2021) and ECB (2021) surveys: very few banks have conducted stress testing of sustainability risks; many are preparing for stress testing; none are close to fully aligning practices with supervisory expectations.
  - Climate risk disclosure appears somewhat limited.
- FSAP recommendations:
  - Authorities should work with the financial sector to expand analytical capacity for assessing climate risks, enhance resilience against unexpected future risks, and promote disclosure of climate risks.
  - The ECB is already conducting stress testing on SIs; FSAP recommends BaFin expand stress test work to cover LSIs.

### Insurance sector vulnerabilities
- Low-interest rate effects:
  - Prolonged low-interest rates affected profitability and solvency of insurers, particularly life insurers with long-term policies with significant guarantees.
  - Guarantees on some policies are as high as four percent.
  - Weighted average years to maturity of German life insurers’ liabilities at end-2020: 26.3 years.
  - Since 2011, life insurers required to build additional reserves under GAAP to reflect potential cost of guarantees in low-rate environment (ZZR: Zinszusatzreserve – Additional Provision to the Premium Reserve).
- Pandemic and credit risks: pandemic increased risk of credit downgrades; EIOPA’s January 2022 Risk Dashboard ranked macro risks as the highest category of risk facing the European insurance sector.
- 2021 EIOPA insurance stress test:
  - Assessed resilience to a prolonged COVID-19 scenario in a “lower for longer” interest rate environment.
  - Confirmed main vulnerabilities stem from market shocks but insurers would be able to cope.
  - Solvency II transitional provisions and management actions would enable adequate solvency to be maintained.
  - Exercise did not show liquidity to be a significant vulnerability; results for German participants consistent with overall results and with insurers’ ORSAs and liquidity stress tests performed at BaFin’s request.

### Macroprudential framework, policy, and recommendations
- Institutional framework:
  - Germany’s institutional framework is strong and operates effectively; arrangements closely aligned with Fund guidance.
  - Macroprudential mandate assigned to the Financial Stability Committee (FSC) (voting members from MoF, Bundesbank, and BaFin); FSC chair (State Secretary of the MOF) seeks consensus.
  - BaFin is National Designated Authority (NDA) for tools specified by European legislation (CRD/CRR) and responsible for domestic macroprudential measures (e.g., residential real estate lending limits).
  - Bundesbank can propose resolutions, exert influence, and retains a veto on amendments and on publication.
- Strategy and transparency recommendations:
  - FSC’s macroprudential instrument strategy should better link macroprudential risks and mitigation measures, articulating link between high-level principles and operational instrument setting.
  - FSC should publish post-meeting records to promote transparency and predictability of decision making.
- Recent macroprudential actions:
  - Increases in the CCyB and the SSyRB for residential real estate exposures were appropriate, well-timed, and well-coordinated.
  - CCyB set to levels broadly consistent with authorities’ buffer guide.
  - Evidence of compressed spreads in corporate debt markets and tilting toward riskier corporate borrowers; weak profit margins limit banks’ ability to generate capital organically.
  - Authorities should use flexibility of discretionary CCyB component to ensure buffer can be materially reduced in event of stress.
- Need for additional macroprudential action:
  - Accelerating mortgage lending and house prices, with evidence of over-valuations, make action on borrower-based measures (BBMs) increasingly urgent.
  - Legal concerns and data gaps have limited activation of an LTV limit; legislative processes to implement past recommendations and close data gaps have proceeded exceptionally slowly.
- FSAP specific macroprudential recommendations:
  - Enhance legislated powers over as-yet unused borrower-based instruments in the Banking Act (Kreditwesengesetz) and related laws, and introduce additional income-based tools as soon as practical. Provision should allow borrower-based instruments to be activated prior to a material deterioration in lending standards.
  - Strengthen guidance on residential real estate lending standards, especially regarding lending against real estate transaction costs; current guidance lacks specificity and consistent reporting limits supervisors’ review of lending practices.
  - Activate legally-binding borrower-based limits as soon as practical unless a material change of direction in real estate and credit markets is observed.
  - FSC should initiate development of a communication strategy to support activation of borrower-based measures to promote acceptability.
  - Note: a measure not accepted by key stakeholders may be challenged in Court, face circumvention, and harm the macroprudential authority’s ability to act.

### Microprudential oversight and banking sector supervision
- Focused review:
  - FSAP conducted a focused review of regulation and supervision of Germany’s LSIs (review reflects frameworks as per October 19, 2021).
  - As EA member, German banks’ regulation and supervision occur within the ECB’s Single Supervisory Mechanism (SSM). BaFin and the Bundesbank supervise LSIs; ECB exercises oversight over functioning of the system.
- Progress and remaining gaps:
  - Authorities made good progress implementing recommendations of the 2016 Basel Core Principles (BCP) assessment.
  - ECB/SSM approach to the Supervisory Review and Evaluation Program (SREP) rolled out to all LSIs in 2020; enhancements made to liquidity and operational risks.
  - Scope remains to further strengthen institutional arrangements, the legal framework and approach to corporate governance, and some aspects of the supervisory framework and approach.

*Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022003.pdf*

### 47.      In response to the Wirecard fraud, the MoF initiated a reorganization program

### In response to the Wirecard fraud, the MoF initiated a reorganization program

### Strengthening BaFin and supervisory reforms
- The MoF initiated a reorganization program including several legal and structural reforms impacting BaFin aimed at:
  - strengthening BaFin’s ability to supervise complex credit institutions,
  - undertake forensic audits,
  - strengthen financial accounting oversight,
  - use of whistleblower information,
  - consumer protection, and
  - further digitalization of business processes.
- The (internal) powers of BaFin’s President were strengthened vis-a-vis:
  - the strategic direction,
  - budget proposal,
  - organization structure, and
  - the ability to give directions to BaFin’s Executive Directors.
- Expected outcomes:
  - enable BaFin to make earlier use of corrective and sanctioning powers,
  - increase effectiveness in dealing with lingering deficiencies of problem banks.
- Recommendation: Streamline reporting to the MoF into a more systematic approach with responsibility elevated to the office/secretariat of BaFin’s president to strengthen BaFin’s operational independence.
- Observation: Communication between BaFin and the MoF appears to go beyond necessary oversight and financial stability responsibilities (as observed in the 2016 assessment and the file review of the current assessment).

### BaFin–Bundesbank coordination and strategic agenda
- Recommendation: A joint BaFin and Bundesbank strategic agenda is critical to avoid duplicative or disjointed efforts and ensure an effective banking supervision program.
- The strategic agenda should:
  - recognize the need for joint projects,
  - work towards shared data, systems, and tools,
  - ensure a fully cooperative partnership on the BaFin reform program.

### Corporate governance in banks
- Finding: Further enhancements are needed to align banks’ corporate governance framework with international best practices.
- Specific weaknesses:
  - Supervisory board oversight of internal control functions needs strengthening (direct reporting lines of internal audit, compliance, and risk management).
  - Current construct allows management boards to dominate essential control functions.
- Recommendation: Modernization of the corporate governance framework will require legal amendments.

### Reliance on external auditors and supervisory review
- Recommendation: Reassess the extent of reliance on external auditors and the authorities’ ability to conduct in-depth file reviews of auditors’ assessments.
- Essential requirement: Supervisors should be well placed to challenge external auditors and perform deep dives on various risk areas when needed.

### Supervisory guidance and MaRisk
- Finding: Supervisors, external auditors, and the industry would benefit from further guidance to complement Germany’s principles-based risk management guidelines (MaRisk).
- Rationale:
  - Given extensive EU regulations, EBA Guidelines, and international standards, MaRisk do not necessarily clearly outline supervisory expectations specific for banks in all areas.
  - Additional guidance is needed for the industry, external auditors, and supervisory staff.

### On-site inspections and supervisory engagement
- Finding: Certain aspects of the overall supervisory framework (e.g., supervisory engagement and frequency of on-site inspections) need strengthening.
- Context:
  - German supervisory framework developed along lines of the ECB LSI SREP methodology.
  - Based on the SREP score and impact, authorities determine minimum level of engagement (MEL) and minimum frequency for on-site inspection of LSIs.
- Issues:
  - The MEL (to be strengthened beginning with the 2022 supervisory cycle) currently does not include a minimum of engagement with management function or internal control functions, even for the lowest risk assessment score.
  - Frequency of on-site inspections should be reassessed to ensure adequate coverage of both the riskiest LSIs and the highest impact LSIs.
- Recommendation: BaFin/Bundesbank need to reassess adequacy of risk resources to ensure satisfactory coverage of on-site inspections, ability to undertake deep-dive reviews, and ensure critical risk expertise.

### Fintech regulation and monitoring
- Policy stance: Authorities have taken a competition and technology neutral approach (same activity, same risk, same regulation).
  - Neobanks and online securities trading platforms must comply with same regulations as incumbent institutions.
  - Crypto assets service providers need to be licensed according to the financial services they provide.
- Observations:
  - Existing regulatory perimeter seems adequate; authorities proactively monitor and act against unlicensed service providers.
  - BaFin has not set up a sandbox; instead, in 2017 BaFin established an “innovation hub” for market monitoring, internal coordination of regulatory and supervisory initiatives (hub and spoke model), and market outreach.
- Recommendation: Continuous monitoring needed; no immediate change to perimeter identified.

### Fintech data collection and market monitoring
- Bundesbank’s Statistics Directorate ran a pilot project to collect data on fintech.
- Findings: First results indicate the size of the fintech sector across different financial sectors is still relatively small.
- Recommendation: Given rapid growth, adopt a more structural approach to data collection, financial stability analysis, and a more dynamic forward-looking market monitoring to match quickly developing monitoring needs.

### Insurance sector: observance and areas for improvement
- Overall: No major shortcomings in observance of Insurance Core Principles, but scope for improvement in four areas:
  - Reduce real and perceived risks to BaFin’s operational independence, as recommended in the previous FSAP.
  - Strengthen and simplify the solvency framework, including:
    - consider impact of more extreme interest-increase scenarios on funding of the Zinszusatzreserve,
    - strengthen liquidity risk management reporting and stress testing requirements,
    - streamline internal model approval and reporting requirements.
  - Reassess minimum and actual frequency of on-site inspections to ensure sufficient frequency for robust risk identification; inspection cost charges should not be a barrier.
    - BaFin should enhance management reporting for systematic tracking and reporting of timeliness of off-site and on-site supervisory activities and provide more comprehensive feedback to insurers.
  - Strengthen the resolution regime to facilitate orderly exit or resolution of a failing large insurer or group:
    - BaFin has extended requirement for recovery plans to a total of 15 insurance groups (over 80 percent market coverage required by the EIOPA Opinion on the 2020 review of Solvency II).
    - BaFin continues resolution planning for the former globally systemically important insurers (G-SII) group.
    - Recommendation: BaFin should have powers strengthened to require contingency plans and resolution plans to exercise resolution of an internationally active insurance group.

### Financial Market Infrastructure — Clearstream Banking AG Frankfurt (CBF)
- Role: CBF is a Central Securities Depository (CSD) providing post-trade infrastructure for German securities markets and acting as a custodian for securities accepted in Germany.
- As of end-2020:
  - market value of outstanding securities held by CBF in collective safe custody was EUR 8.6 billion,
  - it served 286 participants, of which 110 were foreign.
- Legal/operational oversight:
  - CBF is a licensed credit institution under the German Banking Act and authorized to provide banking-type ancillary services under the Central Securities Depositories Regulation (CSDR) of the EU.
  - BaFin supervises CBF as the designated National Competent Authority (NCA); the Bundesbank oversees its SSS operations.
  - CBF’s banking services are supervised jointly by the Bundesbank and BaFin.
- PFMI assessment:
  - CBF found in observance of 20 of the 21 relevant principles of the PFMI and in broad observance of 1.
  - Strengths: high market repute, solid legal basis, comprehensive approach to risk management, clear and transparent rules, comprehensive default management framework regularly tested.
  - Governance weaknesses:
    - Internal control functions of risk management, internal audit, and compliance are the responsibility of a single Executive Board (EB) member—the Chief Executive Officer—who is also responsible for global operations.
    - CEO concurrently Chief Operating Officer and Chief Risk Officer—no separation for second and third lines of defense at EB level.
    - Chair of the Risk Committee is the CRO of CBF’s ultimate parent, Deutsche Börse—not independent.
    - Supervisory Board (SB) performance is not subject to periodic independent assessment.
  - Recommendations for CBF:
    - Separate responsibilities for internal audit from risk management and compliance at the EB level.
    - Appoint an independent member as Chair of the Risk Committee.
    - Conduct periodic, independent reviews of the performance of its SB.
  - Additional risk management enhancements:
    - Strengthen criteria and thresholds that trigger direct participant disclosures on indirect participants (e.g., system-level thresholds).
    - Work toward implementing direct monitoring of risks posed by clients of direct participants.
    - Implement ex-ante monitoring of collateral concentration limit breaches to mitigate credit risk.

### Crisis management, safety nets, and IPS/DGS structure
- Finding: Resolution powers broadly in line with FSB Key Attributes and peers’ good practice; resolution planning well advanced for larger banks, but gaps remain.
- Issues identified from recent cases (Wirecard, Greensill, NordLB recapitalization):
  - Instances of slow decision-making and high intervention costs, even for small and medium-sized institutions.
- Distinctive feature: Highly unique, complex, and broad depositor and institutional protection system.
  - Almost all banks are members of a voluntary DGS or IPS, offering protection levels well above European and international peers.
  - Multiplicity of schemes and high protection levels mean high cost for each failed bank to the scheme it belongs to.
  - Schemes’ target financial resources in some cases only equal to the EU minimum.
  - For all DGSs and IPSs, access to backstop liquidity is limited to uncommitted or ad-hoc borrowing arrangements with members or private sector financial institutions.
- Planned reforms:
  - Strengthen governance and create an ex-ante fund of 0.5 percent of RWAs for the S-Group IPS,
  - Reduce coverage at the private sector voluntary fund,
  - These reforms will not change the structure or lack of backstop funding.
- Recommendation:
  - FSAP welcomes proposed changes but recommends pushing reforms further by simplifying structure to a single mandatory scheme fulfilling the EU Deposit Guarantee Schemes Directive at arm’s length from the industry and with a robust public sector liquidity backstop.
  - In the meantime, authorities should analyze implications of maintaining very high levels of depositor and creditor protection and review suitability of current legal framework for IPSs and voluntary DGS.
- IPS resolution planning:
  - Recommendation: Resolution plans for IPS members should better align with more severe contagion scenarios; FSAP interconnectedness analysis underscores contagion risks within cooperative and savings bank IPSs.
  - Recovery and resolution planning should prepare for scenarios of simultaneous weakness of multiple IPS members or the IPS itself.
  - BaFin should ensure newly submitted IPS recovery plans meet suitably high standards.
  - German authorities should develop a roadmap to ensure adequate coverage of such scenarios in resolution planning for IPS members, promoting review of EU legislation if necessary.
- Additional supervisory practice:
  - BaFin’s reorganization plan recognizes that more proactive use of BaFin’s early intervention powers for weak banks would help prevent banks’ value destruction.
  - Regular use of blanket liability moratoria should be reduced to ensure covered depositors have prompt access to funds.

### Financial integrity (AML/CFT)
- Historical context:
  - FATF’s last report (2010) indicated AML/CFT measures in Germany were generally sound but implementation needed strengthening in some areas, including suspicious transaction reporting and strengthening BaFin’s AML/CFT supervision.
- Reforms and initiatives:
  - BaFin increased AML/CFT supervisory resources, intensified risk understanding, created units focused on high-risk banks, substantially increased onsite AML/CFT inspection activity, and uses AML/CFT supervisory colleges within the EU.
  - Germany introduced a Transparency Register in 2017 to provide better access to beneficial ownership information of companies and trusts; due to be fully operational by the end of 2022.
  - A public-private partnership to strengthen AML/CFT cooperation was launched in 2019.
  - Germany comprehensively assessed its ML/TF risks in 2019 (including virtual assets) and regulates and supervises virtual asset service providers for AML/CFT.
- Remaining issues:
  - German banks have been involved in some high-profile ML cases in recent years.
- Recommendations:
  - Continue strengthening AML/CFT efforts and supervision, including using more remedial actions and sanctions to encourage better compliance (including better reporting of suspicious transactions).
  - Continue to increase coverage and accuracy of beneficial ownership information and improve effectiveness in parts of the AML/CFT system where legal and institutional frameworks have recently changed.
  - Note: Germany’s AML/CFT framework will be assessed under the current FATF methodology, which focuses on effectiveness, in June 2022.

### Authorities' views
- General: German authorities greatly valued the FSAP engagement and cooperative discussions during the pandemic and broadly agreed with the FSAP assessment and meaningful recommendations.
- Macroprudential framework and policy:
  - Authorities appreciated recommendations and broadly shared the FSAP’s risk assessment.
  - They stressed appropriateness of policy package announced by BaFin in January 2022.
  - Noted implementation of most other recommendations related to real estate risks is either planned or already underway (e.g., closing data gaps and adding income-based instruments to the toolkit).
  - The communication recommendation is useful input for the FSC’s broader communication strategy.
- Banking sector profitability:
  - Authorities appreciated FSAP analysis on profitability.
  - They stressed German institutions’ profitability tends to be below the EU average, reflecting conservative, low-risk business models in a historically low interest rate environment.
  - Looking ahead, negative external factors like the war-in-Ukraine could further weigh on profits.
  - Authorities have undertaken a wide range of initiatives to assess risks related to external factors and their impact on banking sector profitability.

*Source: IMF Financial Sector Assessment Program (FSAP) — Germany (content unit: 1deuea2022003 - 47).*

### 71.      The authorities appreciated the IMF’s efforts to carry out the solvency stress test,

### The authorities appreciated the IMF’s efforts to carry out the solvency stress test,

### Solvency stress test findings and authorities' views
- The results for most risk categories are in line with the authorities' expectations.
- Authorities noted IMF’s conservative assumptions, particularly:
  - Full pass through of policy rates to funding cost of large banks, which renders an impact on banks’ NII that is significantly larger than they would deem realistic.
  - Mitigating effects of hedging seem to be addressed only partly.
- There are large differences in NII between the FSAP’s calculations and the results from the EBA EU-wide stress tests.
- Authorities viewed FSAP stress test results showing that the overall banking system is resilient but cautioned against complacency given economic transformation in the world and uncertainty about how financial systems will adapt.
- Authorities welcomed FSAP recommendations to:
  - Continue to monitor the sensitivity of banks’ balance sheets to evolving risks.
  - Strengthen capital buffers as needed to be able to mitigate risks.

### Interconnectedness and contagion analysis
- Authorities highly appreciated the FSAP’s interconnectedness and contagion analysis.
- For the banking system, they emphasized the importance of defining relevant banking groups according to their specific risk profile.
  - This is particularly relevant for the savings and cooperative banking sectors and their central institutions.
- Authorities will continue to carefully monitor risks, focusing on highly connected market players and relevant markets, and further improve their analytical toolkit for assessing contagion risks.

### Interest rate risk monitoring for LSIs and reporting developments
- Recommendation: Strengthen LSIs’ interest rate risk monitoring, including by gathering data.
- European regular reporting for LSIs does not envisage the same reporting as for large banks (SIs); however, BaFin and the Bundesbank carry out close monitoring of LSIs’ interest rate risks.
- All German banks are obliged to report their interest rate risk coefficient quarterly, which relates the economic value loss on interest rate sensitive assets and liabilities resulting from:
  - A hypothetical abrupt rise or fall of the yield curve by 200 bp and six additional yield curve scenarios.
- The biennial LSI stress test gives in-depth insights into the interest rate risk of LSIs.
- Progress in extending reporting standards:
  - From May 2022, all banks besides small and non-complex institutions have to follow the EBA ITS market disclosure, which includes an earning-based metric of interest rate risk.
  - The more comprehensive reporting, expected to include data on retail deposits, wholesale funding, and interest-bearing assets, is still under discussion in the EBA working groups.

### Liquidity stress analysis
- Authorities appreciated the IMF’s liquidity stress analysis and shared the IMF’s view that the German banking system, in general, appears resilient to liquidity stress.
- They emphasized awareness of liquidity risks related to U.S. dollar exposures of some LSIs, which are already well reflected in ongoing supervision.
- In their view, no further efforts regarding U.S. dollar supervision are justified and necessary.

### Financial safety nets
- Authorities considered that maintaining the existing multiple deposit guarantee schemes appropriately reflects the three-pillar structure of the German banking system.
- Ongoing reforms will adequately ensure their continuing effectiveness, including their funding capacity.
- Authorities felt that maintaining this structure would not pose an obstacle to ongoing European discussions on a single European deposit insurance scheme.

### LSI regulation, supervision, fintech, and digitalisation
- Authorities appreciated FSAP analysis and recommendations on LSI regulation and supervision, as well as on fintech and digitalisation.
- They welcomed recommendations to improve the robustness and resilience of the financial system.
- Authorities were encouraged to continue efforts as part of a well-established ongoing process to align the supervisory framework with the latest international standards taking into account national specificities.
- Implementation status:
  - Some recommendations are already under way and scheduled.
  - Others are under careful analysis.

### Climate-related transition risk analysis
- Authorities welcomed the FSAP’s climate-related transition risk analysis; results were consistent with the Bundesbank’s own analysis despite using different methodologies.
- They agreed FSAP’s assessment that BaFin and the Bundesbank need to continue existing initiatives (such as the survey on the implementation of BaFin’s Guidance Notice) to support German banks in enhancing their risk management processes concerning sustainability risks.

### Acknowledgement of CPMI-IOSCO assessment
- The German authorities thanked the IMF assessment team for their valuable work and detailed study on the observance of the CPMI-IOSCO Principles for Financial Market Infrastructures regarding CBF.

*Source: IMF staff report excerpts.*

### Appendix I

### Appendix I. Banking Sector Stress Testing Matrix

### A. Banking Sector Solvency Test — Domain Framework
- SIs’ credit risk modeling:
  - Relied on IFRS9 modeling and transition matrices.
  - Used PDs and LGDs reported by banks in the COREP templates.
  - Considered geographical exposures to Germany, the U.S., the U.K., France, Italy, and Spain.
  - Evolution of IFRS9 transition matrices for SIs based on beta-linked models from Gross, Laliotis, Leika, and Lukyantsau (2020).
- LSIs’ credit risk modeling:
  - Relied on traditional approaches under domestic GAAP.
  - Used PDs and LGDs published by the EBA in the risk dashboard for the German banking system to benchmark starting points.
- Nonfinancial corporates’ credit risk:
  - Elasticity parameters (PDs and LGDs) derived from an empirical model of default rates and loss rates using supervisory data (German Credit Registry) with 2021 as benchmark starting point.
  - Satellite models: (1) panel regressions of default rates and of loss rates at the sectoral level with macro-financial determinants; (2) sector-by-sector regressions; sectoral LGDs derived from default rates and loss rates. Data source: German credit registry and Bundesbank.
- Household default risk:
  - Modeled from a micro-macro structural model using Household Finance and Consumption Survey under full recourse mortgages assumption (households default only if unemployed and fully deplete financial savings).
  - Based on Gross, M., Tressel, T., Ding, X., and Terenau, E., 2022, “What Drives Mortgage Default Risk in Europe and the U.S.?”, IMF Working Paper No. 2022/065.
- Interest rates and Net Interest Income (NII):
  - Estimates from empirical regression model covering 2006-2019 using individual bank data.
  - NII model linked NII to spread between short-term rate and long-term yield, implying pass-through from bank funding costs to lending rates smaller than one.
  - Analysis assumed a 100 percent pass-through from policy rates/short-term market rates to funding costs of banks (conservative assumption).
  - Stress test also assumed static balance sheet.
  - Adverse scenario included a 10 percent loss in fee and commission income in 2022-23.
  - Funding shocks and interest risk analysis for SIs used contractual and notional maturities reported in supervisory template IRRBB as of 2021:Q2; STE template includes derivative hedges for interest rate risk.
  - For LSI, maturity structure proxied from aggregate data and assumed interest-bearing assets and liabilities had same maturity structure.
  - Net Fees and Commission income and other income/expenses: constant share of assets, except for SI adverse scenario where a 10 percent loss is assumed in 2022 and aligned with static asset growth from 2023 onwards.
- Sovereign credit risk and market risk:
  - Merton model combined with baseline and adverse scenario projections of short-term interest rate and long-term yield on securities.
  - Considered a shock to sovereign exposures to Italy and Spain (and exposures to Russia) and an additional shock of 25 percent to real estate valuations.

### Stress test horizon and scenarios
- Stress test horizon:
  - 5 years (2022-2026).
- Scenario analysis:
  - Baseline from the revised Spring WEO.
  - Adverse scenario severity benchmarked on a 3 standard deviation shock to real GDP growth relative to baseline over 2022-2023 and closing of output gap at end of simulation horizon.
  - Macro-financial simulations realized based on MCM GFM macro-financial DSGE model by Vitek, 2018, “The Global Macrofinancial Model”, IMF WP 18/81.
  - Macro-financial scenarios for exposures to U.S., U.K., France, Italy, and Spain for the 16 SIs.
  - Adverse scenario characterized by a V-shape path for real GDP growth, tightening of global financial conditions, uncertainty about economic environment, renewed COVID-19 infections and lockdowns, global supply chain disruptions, rise of commodity prices, de-anchoring of inflation expectations and a trade-off for monetary policy between unemployment and inflation (as described in the RAM).
- Sensitivity analysis:
  - Considers shocks to exposures to Russia.

### Risks, buffers, and behavioral assumptions
- Risks/factors assessed:
  - Credit risk (corporates, households and real estate, sovereigns of high debt countries).
  - Interest rate risk in the banking book.
  - Market risk (interest rate, spreads).
- Behavioral adjustments:
  - Static balance sheet assumption for LSIs and for SIs.
  - Cures no/with write-offs and new credit production endogenously consistent with credit growth assumption.
  - Portfolio composition unchanged over time.

### Calibration, standards, and reporting
- Calibration of risk parameters:
  - TTC and Initial PiT PDs and LGDs obtained from supervisory files for SIs, or estimated at the asset class level from the EBA risk-dashboard 2021:Q3 for LSIs.
  - Dynamic PDs from model estimated in line with WEO baseline and adverse scenarios.
- Regulatory/accounting and market-based standards:
  - Regulatory capital ratios for IRB and STA portfolios, and IFRS9 or national GAAP accounting standards.
- Reporting format for results:
  - Aggregate results and contributions to evolution of capital ratios.

### B. Liquidity Banking Sector Stress Testing Matrix (STeM) — Domain Framework
- Approach:
  - Top-down by FSAP team.

### Institutional perimeter and data
- Institutions included:
  - 17 SIs, and 40 randomly selected German LSIs across commercial, savings, cooperative, building societies and mortgage banks.
  - Composition of LSI sample chosen to balance inclusion of bank groups and reflect number of entities by group and quintile of banking sector asset distribution.
  - Excludes branches of non-German banks.
- Market share:
  - 17 SIs (out of 21), account for about [45] percent of banking sector assets
  - 40 LSI (out of >1300 LSIs), randomly chosen; sample accounts for about 3 percent of LSIs (in terms of banks and assets).
- Data and baseline date:
  - ECB/SSM and Bundesbank: Liquidity Coverage Ratio and the Net Stable Funding Ratio and Cash flow table from the COREP data repository.
  - Data as of September 2021 for LSIs and December 2021 for SIs.
  - Scope of financial consolidation: consolidated at national bank level.

### Channels of risk propagation and methodology
- Cash-flow stress test:
  - Analyzes net cash balance accounting for available unencumbered assets, contractual cash inflows and outflows, and behavioral flows.
  - Relevant second-round effects could be considered: margin calls for existing collateral positions; non-emergency liquidity provision by the central bank; additional asset haircuts due to fire sales; additional repo haircuts due to limited collateral supply; wholesale funding market freezes because of banks’ solvency and liquidity concerns.
  - Test repeated for US dollar liquidity for relevant reporting banks.
  - Analysis complemented with LCR and NSFR statistics.
- Stress test horizon for cash-flow analysis:
  - Horizon of stress events varies by scenario and can extend up to a period of 1 year).

### Tail shocks and scenario analysis
- Baseline and three adverse scenarios with varying intensity of liquidity conditions, formulated in terms of roll-on/roll-off rates and haircuts to CBC:
  - (a) New wave of COVID-19 cases:
    - Net outflows of retail deposits of households drawing down their savings (peaking up at the one-month horizon).
    - Increased use of credit lines.
  - (b) Significant increase in risk aversion:
    - Higher haircuts on counterbalancing capacity assets due to financial market stress.
    - Some outflows of wholesale funds; outflows related to rating downgrades and some deposit outflows peaking at the 2-month horizon.
  - (c) Combined significant increase in risk aversion with higher and more sustained inflation:
    - Stronger outflows of nonoperational deposits peaking in a one year-horizon and stronger haircuts but weaker outflows from downgrades.
- Sensitivity analysis:
  - A range of alternative scenarios applied to the entire set of LSIs.

### Risks, buffers, and behavioral assumptions (liquidity)
- Risks/factors assessed:
  - Funding liquidity risk reflected in funding and asset roll-off rates (cash inflows related to non-renewal of maturing assets).
  - Market liquidity risk reflected in asset haircuts influenced by market movements, potential fire sales and collateral supply considerations.
- Behavioral adjustments:
  - Liquidity from the central bank’s emergency lending assistance (ELA) is not considered.
  - Cash-flow analysis may consider behavioral assumptions about counterparties’ ability or willingness to transact based on banks’ solvency and liquidity conditions.

### Calibration, standards, and reporting (liquidity)
- Calibration of risk parameters:
  - Cash-flow analysis may incorporate second-round effects.
  - Stress funding run-off rates, asset roll-over rates, and asset haircuts calibrated based on empirical evidence and international experiences.
- Regulatory/accounting and market-based standards:
  - LCR per Basel III; the hurdle at 100 percent (at the aggregate currency level).
  - Net cash balance for cash-flow analysis; to pass, a non-negative net cash balance is required, where the balance reflects net funding outflows and counterbalancing capacity.
  - NSFR per Basel III; limit of 100 percent applied.
- Reporting format for results:
  - Changes in system-wide liquidity position, including drivers for cash outflows, cash inflows and counterbalancing capacity.
  - Distribution of banks’ liquidity positions.
  - Number of institutions with LCR/NSFR below 100 percent and/or negative net cash balance.
  - Amount of liquidity shortfalls (scaled).

### Infrastructure
- Infrastructure developed by IMF staff with FINREP/COREP data input.

*Source: Appendix I — Banking Sector Stress Testing Matrix (Germany).*

### Appendix II. Implementation of 2016 FSAP Recommendations—

### Appendix II. Implementation of 2016 FSAP Recommendations— Staff’s Assessment

### Financial stability policy framework
- Recommendation: Establish a core set of readily-available, consistent data for banks and non-banks to strengthen financial stability and macroprudential policy analysis.
  - Time Frame: Medium term
  - Status: Implementation in progress.
  - Findings:
    - Bundesbank is integrating selected granular supervisory and statistical data of banks, insurance companies, and investment funds to build a “house of microdata (HoM),” which will be used for financial stability and macroprudential policy analysis along with other information sources.
    - Bundesbank is in the process of integrating bank supervisory microdata according to the common reporting framework (COREP).
- Recommendation: Develop the legal basis for real estate-related macroprudential tools.
  - Time Frame: Short term
  - Status: Implementation in progress.
  - Findings:
    - On March 30, 2017, the Bundestag passed legislation that implements part of the FSC’s recommendation of June 2015 and entered into force on June 10, 2017.
    - The law introduced new instruments for residential real estate loans (does not cover non-residential CRE loans), allowing for capping LTV ratios and setting amortization requirements for financial stability purposes.
    - The requirements are meant to apply to all financial institutions if activated.
    - The law omits complementary DTI and DSTI ratio instruments recommended by the FSC in 2015 and does not address important data requirements for the effective operation of the real estate-related macroprudential instruments.
    - An ongoing one-off bank survey on real estate lending and corporate credit underwriting standards is expected to provide valuable information on possible financial risks in specific segments of real estate markets.

### Banking oversight
- Recommendation: Implement measures to strengthen the oversight role of the banks’ supervisory board.
  - Time Frame: Short term
  - Status: Partially implemented.
  - Findings:
    - Authorities made progress (e.g., providing the Board the power to directly obtain information from audit and risk control functions).
    - Corporate governance framework for banks deviates on important elements from international best practices (e.g., no decision-making responsibilities regarding strategic direction, risk appetite, strategy and related policies and no requirements for independent Board members).
- Recommendation: Provide guidance on risk management and other supervisory requirements (loan portfolio management, concentration and related party risk, operational risk).
  - Time Frame: Short term
  - Status: Implementation in progress.
  - Findings:
    - Additional guidance has been issued in several areas.
    - Further guidance may be needed because:
      - external auditor‘s MaRisk compliance reports have been found to be varying in quality;
      - MaRisk’s principle-based nature may not clearly outline BaFin’s supervisory expectations linking to EBA Guidelines (e.g., need to track/aggregate related party transactions, expansion of operational risk points);
      - supervisors need tools to effectively challenge the work of the external auditor to rely on it.
- Recommendation: Increase granularity and coverage of bank supervisory data.
  - Time Frame: Short term
  - Status: Implementation in progress.
  - Findings:
    - Substantial progress in collecting liquidity risk data since the 2016 FSAP.
    - Data availability regarding certain aspects of credit risk, related party transactions, and market risk can be further enhanced.
    - Necessary information may be available during on-site inspections but is not easily available or accessible per institution for periodic offsite analysis or across the sector.
    - BBk issued an ordinance to collect semi-aggregate data (distributions) regarding lending for the acquisition of real estate, including information on: the number and amount of these loans granted; whether covered by debt insurance; loan to value ratios; debt servicing ratios; debt to income; and some internal risk indicators.
- Recommendation: Strengthen rules and supervisory processes for acquisitions and exposures to related parties.
  - Time Frame: Medium term
  - Status:
    - Acquisitions: Not implemented.
      - BaFin indicated the German Federal Parliament views acquisitions in other entities as a business decision and ex-ante review/(dis)approval by the supervisory authority is not seen as necessary for major acquisitions outside the EU.
      - No European provisions currently require such ex-ante procedures.
      - No changes in German laws, regulations or guidelines concerning major acquisitions have been made.
      - Where acquisition triggers a qualifying holding procedure in a Member State, the national competent authority would have to consult BaFin.
    - Exposures to related parties: Partially implemented.
      - Authorities expanded the definition of related party transactions in the KWG.
      - Limited framework requires institutions to establish appropriate procedures to manage and monitor related party transactions.
      - No specific requirements to set internal limits, aggregate and regularly report exposures to the supervisory board, or for regulatory reporting of these exposures.
      - 2018 Euro FSAP noted material deficiencies at ECB/SSM level for major acquisitions and related party transactions.
- Recommendation: Streamline and simplify the SSM decision making processes (to be taken at the EU level).
  - Time Frame: Medium term
  - Status: Not in scope of the assessment.

### Insurance oversight
- Recommendation: Prepare a communication strategy ahead of the publication of Solvency II indicators.
  - Time Frame: Short term
  - Status: Implemented.
  - Findings:
    - BaFin conducted bilateral discussions with life insurance (LI) companies ahead of the publication date of May 21, 2017.
    - BaFin and the Bundesbank are continuously informing the public of analyses on Solvency II indicators.
- Recommendation: Extend the application of G-SII toolkit on a risk-based basis to other large groups, including recovery and resolution planning, enhanced supervision and regular stress tests.
  - Time Frame: Medium term
  - Status: Implemented.
  - Findings:
    - BaFin extended the requirement for recovery plans to two other groups headquartered in Germany, beyond the country’s single G-SII.
    - Supervisory teams are defining elements of the plans and will review them once finalized.
    - BaFin does not currently intend to further extend this requirement to other groups.
    - Germany participates in EIOPA stress testing exercises:
      - In 2016, 20 life insurers covering three quarters of the market participated.
      - The fourth EU-wide stress test exercise in 2018 included 5 large German insurance groups.
    - Insurers are required to perform additional stress tests as part of risk and solvency analysis (Insurance Supervision Act, section 27); results are part of narrative reporting to BaFin.
- Recommendation: Communicate supervisory expectations based on the ORSA review more systematically; use Solvency II framework to impose capital add-ons.
  - Time Frame: Medium term
  - Status: Implemented.
  - Findings:
    - BaFin gives feedback to firms based on ORSA reviews, especially where firms do not hold sufficient own funds over and above the SCR.
    - BaFin encourages improvements in ORSA reports in areas identified as weak in the 2017 assessment (depth of information; assessment of overall solvency needs; continuous compliance with regulatory capital requirements and technical provisions; risk profile’s deviation from SCR assumptions; quality of stress tests).
    - At the IAIS level, BaFin participates in discussions on addressing systemic risk in insurance.
    - Capital add-ons are not a first resort, but BaFin is ready to set capital add-ons case-by-case when preconditions under Solvency II are met.
    - BaFin is developing internal guidance on capital add-ons to ensure a uniform approach consistent with legal requirements under Solvency II.
- Recommendation: Require action plans for companies facing difficulties in meeting Solvency II requirements, including stress testing to ensure compliance after a plausible shock.
  - Time Frame: Medium term
  - Status: Implemented.
  - Findings:
    - BaFin monitors companies’ progress towards compliance with solvency capital requirements without Solvency II transition measures and assesses plans yearly.
    - BaFin is thoroughly reviewing internal models, including developing a new stochastic approach (BSM— Branchen simulations model) to better account for embedded options and guarantees of typical life insurance products.

### Asset management oversight
- Recommendation: Intensify frequency of on-site inspections and enhance risk classification methodology.
  - Time Frame: Short term
  - Status: Implemented.
  - Findings:
    - BaFin revised the risk classification methodology for supervised asset managers and has applied improved impact criteria since 2018.
    - Frequency of on-site inspections increased:
      - 80 in 2014
      - 102 in 2016
      - 116 in 2017
      - 99 in 2018
      - 110 in 2019
      - 118 in 2020
- Recommendation: Introduce stronger rules on reporting of pricing errors and investor compensation rules.
  - Time Frame: Short term
  - Status:
    - BaFin published “Mindestanforderungen an das Risikomanagement von Kapitalverwaltungsgesellschaften” (KAMaRisk) in January 2017, a circular on minimum requirements for the risk management of investment managers, among other things.

### Crisis management and resolution
- Recommendation: Develop a formal systemic crisis coordination mechanism including German authorities, SRB and ECB.
  - Time Frame: Short term
  - Status:
    - SRB updated its Cooperation Framework between the SRB and NRAs; approved on 17 December 2018.
    - SRB developed a Crisis Governance Handbook with defined interfaces to NRAs and the ECB.
    - The German NRA developed and implemented a crisis governance document including defined crisis phases, interfaces, committees, and responsibilities.
    - Work on the overall German National Crisis Handbook was extended in 2020 to consider lessons learned from the National Crisis Simulation Exercise in 2020 and to include recent legal developments (e.g., BRRD 2 & national implementation act).
    - German authorities have not yet tested this handbook in a real systemic crisis; seeking more financial stability expertise may be advisable.
- Recommendation: Ensure plans for adequate funding to support the orderly resolution of banks and discretionary ELA post-resolution.
  - Time Frame: Short term
  - Status:
    - The SRF, (in the future including the common backstop provided by the ESM, once it has been signed, ratified, and entered into force) may provide liquidity in resolution.
    - In 2021, the SRB published its operational guidance on liquidity and funding in resolution for banks.
    - Topic under further consideration in the EU, especially in the context of the review of the crisis management framework with an EU Commission proposal expected for Q3 2022.
- Recommendation: Remedy operational challenges to resolution actions; ensure authorities retain control during resolution; test contingency plans in a system-wide crisis exercise.
  - Time Frame: Short term
  - Status:
    - SRB and NRAs have conducted and will continue to conduct crisis simulation exercises to test procedures and identify potential challenges; “Lessons learned” are shared among RAs.
    - The German NRA developed and executed a national crisis simulation exercise for an LSI in 2020 including:
      - Formal activation of crisis mode and decision-making process
      - Valuation 2 (mandate, operational steps, and simulated data request)
      - Calculation of bail-in and analyses of affected creditors
      - Drafting of resolution order and accompanying decision documents (resolution decision)
      - Entire communication with the Ministry of Finance including approval of resolution order
      - Notifications in accordance with Art. 81 (3) of the BRRD (FOLTF)
      - Press release and FAQs
      - Publication of resolution order and press release on website
    - Another national crisis simulation exercise will most likely be executed by the German NRA in the course of 2022.
- Recommendation: Review efficiency of SRM decision making (to be taken at the EU level).
  - Time Frame: Medium term
  - Status:
    - A review of the SRMR is within the scope of the European Commission and has been initiated (Crisis Management and Deposit Insurance Framework “CMDI” Review). It will be conducted together with co-legislators at EU level (Council and Parliament).

### Financial Market Infrastructure – Eurex Clearing
- Recommendation: Strengthen the liquidity stress tests and upgrade the secondary site with staffing arrangement.
  - Time Frame: Short term
  - Status:
    - Eurex Clearing conducts a broad range of stress tests on a daily basis in addition to the cover-2 stress tests required by law.
    - Additional stress test scenarios include: late funding, idiosyncratic, market disruption, market disruption paired with the idiosyncratic scenario, inverse scenario.

### AML/CFT
- Recommendation: Increase the effectiveness of the AML/CFT supervisory framework over cross-border banks.
  - Time Frame: Short term
  - Status: Implementation in progress.
  - Findings:
    - Since the 2016 FSAP, BaFin’s AML Department hired 32 new staff for two new divisions established for AML/CFT banking supervision, focusing on banks with higher risk and need for intense supervision (i.e., major banks with cross-border operations).
    - Additional staff conduct AML/CFT audits (rather than external auditors).
    - BaFin set up in five cases an inhouse “special representative” in a major bank to conduct audit functions and ongoing AML/CFT monitoring of this bank.
    - BaFin intensified its risk understanding, identifying correspondent banking as high-risk.
    - AML/CFT legal framework was revised in June 2017, in line with the 4th EU Money Laundering Directive, with efforts underway to transpose the 5th EU Money Laundering Directive.

### Time frame definition
- Note: Short term is one year, while medium term is 2-3 years.

*Germany, Financial Sector Assessment Program, Financial System Stability Assessment, IMF Country Report No. 16/189, June 2016.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022003.pdf_