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Bundesbank Says Low Interest Rates Encouraging Risk Build-Up 

November 17, 2016

Carolynn Look & Alessandro Speciale, Bloomberg

Persistently low interest rates are encouraging the build-up of risks that could threaten financial stability, Germany’s Bundesbank said.

While cheap borrowing costs are necessary in the current environment of subdued economic growth, banks and life insurers would likely suffer most if rates were to rise suddenly, the central bank said in its Financial Stability Review published Wednesday. It warned that a future rise in interest rates could affect multiple financial institutions simultaneously and take on a systemic dimension.

“At this moment, if we look at the financial markets, we see a danger of market participants holding false certainties -- and thus, expecting interest rates to stay low and asset prices to stay high over the long term, taking excessive risks,” Bundesbank Vice President Claudia Buch said in a speech in Frankfurt. “Financial stability considerations therefore warrant the build-up of risk buffers so that losses from unforeseen events can also be cushioned.”

The European Central Bank’s prolonged low interest-rate policy has raised concern in Germany about the profitability of its banks. While the Bundesbank said there can be no doubts about the liquidity and solvency of German lenders, the report highlighted the risks financial institutions could face if macroeconomic settings were to suddenly change. Read more

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