German central bank warns against risks in financial system

BERLIN, Nov. 29 (Xinhua) -- A booming economy and low interest rates in Germany may mask underlying weakness in the country's financial system and lead to an overestimate of debt capacity, the German central bank (Bundesbank) warned Wednesday.

In its financial stability report, the Bundesbank warned of a growing risk of complacency among German policymakers, investors, and consumers after an economic momentum that's been going strong for eight years.

The Bundesbank is hence less upbeat than the European Central Bank (ECB) about financial stability. According to the ECB, economic stress factors throughout the eurozone declined in the past six months thanks to a spreading recovery.

Nevertheless, both the Frankfurt-based central banks share fears surrounding the poor performance of financial institutions and their related ability to cope with a sudden shock.

The Bundesbank noted that even though banks had been forced to build up much larger capital reserves in the wake of the financial crisis, there was still reason to believe that preparations for potential credit defaults were insufficient. Small and mid-sized banks in particular could face difficulties if interest rates were to rise abruptly from their current extremely-low level.

Furthermore, risks of re-evaluations, interest rate changes and credit defaults could materialize simultaneously and reinforce each other.

Bundesbank director Andreas Dombret told a press conference that the Bundesbank was monitoring the risk posed by an interest rate hike "very carefully".

Only recently, the German Council of Economic Experts identified "clear signs" that the German economy was approaching the limits of its capacity. The development was seen as raising the likelihood of irrational lending and investing patterns which could ultimately cause a recession when a resulting bubble pops.

Regarding German real estate, the Bundesbank saw no bubble despite a steep rise in prices. The central bank pointed out, however, that housing cost in some German cities is up to 30 percent higher than appropriate. Enditem