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German financial watchdog warns on low rates ‘poison’

German financial watchdog warns on low rates ‘poison’

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Low interest rates are a “seeping poison” for Germany’s banking system, the head of the country’s financial watchdog has warned, in the latest expression of German fears over the European Central Bank’s policies.

In a bid to revive Europe’s moribund economy, the ECB pushed its deposit rate into negative territory in 2014, before cutting it further to minus 0.4 per cent in March.

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But while lower interest rates have helped lenders in southern Europe struggling with bad loans, in Germany they not only hurt savers but put huge pressure on banks and life insurers. Such groups have long been dependent on interest rate income

At its annual press conference on Tuesday, BaFin, the German regulator, said that to mitigate the risks from low interest rates, it would raise capital requirements for the 1,600 smaller banks that it directly supervises. It also warned that “some” of Germany’s pension funds could soon be “unable to meet their commitments fully” on their own.

“We are currently discussing with them what to do next,” said Frank Grund, head of insurance and pension fund supervision at BaFin. “We’re well aware what a big responsibility we have.”

Germany’s life insurance industry has also come under pressure from low interest rates. Many companies traditionally guaranteed policyholders returns that have become increasingly hard to meet with yields on government bonds — historically one of the insurers’ main sources of income — at record lows.

Felix Hufeld, BaFin’s president, said that Germany’s life insurance industry ought to be able to meet its commitments in the short and medium term.

However, Mr Hufeld said that a proposal from Germany’s finance ministry to limit the guaranteed returns insurers can offer clients from 1.25 to 0.9 per cent per year was “correct”, and added that “it is hard to say how things will develop”.

“It could be that, in the long term, not all companies can cope with this pressure,” he said. BaFin has “a handful” of life insurers under close supervision but its officials declined to say how many could eventually have to wind their business down.

Bafin’s concerns are the latest in a string of warnings about the effect of the ECB’s policies to come from Germany — a country whose experience of hyperinflation in the 1920s has left it with a deep-seated suspicion of loose monetary policy, and where a culture of saving is deeply entrenched.
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Germans saved 16.9 per cent of their disposable income in 2014, making Germany the second-thriftiest country in the European Union after Sweden. Numerous German politicians and financiers have accused the ECB of expropriating the country’s savers. One recent study by a German bank claimed that low interest rates would deprive German households of €200bn between 2010 and 2016.

Wolfgang Schäuble, the country’s influential finance minister, recently went even further, suggesting that the ECB’s policies had contributed to the rise of the far-right Alternative for Germany party, and arguing that the world’s big central banks should co-ordinate their efforts to raise rates.

Courtesy : ft.com



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