The risk of insolvency among German companies has risen. In view of the difficult economic situation, there is a danger that the share of problematic loans, bonds and securitisations will increase. In the case of follow-up financing agreements, the likelihood of borrowers defaulting has risen. This is due to higher market interest rates that borrowers might not be able to afford.

Were credit defaults to increase, German credit institutions would come under pressure as a result. Institutions particularly at risk would be those with low equity ratios, those that have furnished too few loan loss provisions up until now or failed to sufficiently diversify their risks.

Sentiment in the economy deteriorating

The risk environment has transformed in some areas over the course of 2023. Energy was not as scarce as feared, and supply chains proved robust for the most part. Nonetheless, the conditions in which German companies are operating have become more difficult. The interest rate turnaround and tighter loan granting standards have caused financing costs to rise strongly. This was fuelled by the persistently high inflation, marked wage increases and the cost-intensive transformation towards a climate-neutral economy in conjunction with dwindling demand. The latter is the case particularly in the automobile industry, most notably their suppliers.

There is another factor to bear in mind: the extraordinary support measures offered by the government due to the COVID-19 pandemic and the energy crisis that emerged in 2022 are coming to an end. This could engender a rise in credit default rates among companies affected by this, for example in the restaurant business. Energy-intensive sectors such as the chemical industry and the paper and glass production sectors are also affected by the persistently high energy prices.

Above all, the numerous companies strongly focussed on exports have also come under pressure as a result of increasing trade restrictions and a global subsidy race.¹ What is more, there is less room for fiscal and monetary manoeuvre if the economy needs shoring up in the face of a renewed crisis. This can be attributed, among other things, to the higher interest rates and the anti-inflationary monetary policies of the central banks.²

All in all, German economic output did not show any growth in 2023 according to the forecasts of economic research institutions and banks, but actually contracted slightly. Institutions expect weak economic activity in 2024 as well.

Default risks for banks on the increase

Since the beginning of 2022, company insolvencies have been rising – albeit from an unusually low level during the COVID-19 pandemic (see Figure 1). This is especially the case in the social services and healthcare sectors as well as the property and housing sectors, most notably among real estate project developers. The number of insolvencies in these sectors has risen by 57 and 44 percent respectively compared with the end of 2019 – i.e. the year before the onset of the COVID-19 pandemic.

Figure 1: Development of company insolvencies in Germany

Source: LSEG Datastream, Federal Statistical Office of Germany, as at October 2023

Writedowns in the credit portfolios of banks rose only slightly until the third quarter of 2023 compared with the first quarter of 2023. However, particularly LSIs are increasingly strengthening their risk provisioning (see Figure 2).

Figure 2: Development of risk provisioning of German banks

Source: Joint calculations of BaFin and the Bundesbank based on the supervisory reporting system, as at 30 September 2030

For institutions that draw up their balance sheets in accordance with the German Commercial Code (Handelsgesetzbuch), risk provisions include specific loan loss provisions, lump-sum specific loan loss provisions, general loan loss provisions and reserves under section 340f of the Germa Commercial Code.

In the case of SIs, the NPL ratio amounted to an average 1.46 percent in September 2023; the LSIs recorded a somewhat lower ratio of 1.42 percent (see Figure 3). The highest NPL ratio was recorded by the regional banks and other credit banks (1.69 percent); among the institutions affiliated to a banking network (Verbundinstitute) the ratio was lower (savings banks: 1.31 percent, credit cooperatives: 1.42 percent). As regards the sectors, the highest NPL ratios were recorded by “other real estate”, which also includes commercial real estate.³

All in all, the NPL ratios in Germany – compared with the European banks in the Single Supervisory Mechanism (SSM) – remained at a low level.

Since September 2022, however, the NPL ratios have been gradually rising on the whole, by 13 basis points or 10 percent. BaFin expects this trend to continue.

Figure 3: Development of NPL ratios of German banks

Source: Joint calculations of BaFin and the Bundesbank based on the supervisory reporting system, as at 30 September 2023

According to the Eurosystem’s Bank Lending Survey (BLS), banks in Germany have been tightening their loan granting standards since the beginning of 2022 and implementing higher risk premiums for certain loans. However, the capital markets are demanding higher risk premiums than banks. What is more, demand for loans among companies has weakened since the beginning of 2023. The institutions expect this trend to continue. According to the BLS, banks plan to further tighten their lending conditions for corporate loans.

Insurers also affected

Insurers are equally affected by loan default risks because they grant corporate loans themselves and invest in private debt funds. These private debt⁴-funds provide companies with debt capital. The loans that they grant are as a rule collateralised.

Insurers have continuously expanded their share of private debt investments in their portfolios in recent years, particularly in response to the phase of low interest rates. At the end of 2023, these investments accounted for nearly five percent of investments on average; with some insurers, the share was significantly higher.

Private debt investments contribute towards diversifying the overall portfolio. However, they place very high demands on an insurer’s risk management. It is of particular importance that insurers have a clear understanding of the business models of the companies to which the private debt funds are granting debt capital.

The credit and surety insurers under BaFin’s supervision are also affected due to the economic slowdown and rising number of company insolvencies. An increase in the claims ratio can be noted overall – also among surety insurers that assume guarantees and sureties for the stressed construction industry. But the ratio remains in an acceptable range.

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Risks in BaFin's Focus 2024
Foreword by the President

Main Risks in BaFin’s Focus

1. Risks arising from significant increases in interest rates
2. Risks arising from corrections on the real estate markets
3. Risks arising from significant corrections on the international financial markets
5. Risks arising from cyberattacks with serious consequences
6. Risks arising from inadequate money laundering prevention
7. Risks arising from market concentration due to the outsourcing of IT services

Trends

1. Digitalisation
2. Sustainability
3. Geopolitical turmoil

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Complete edition Risks in BaFin’s Focus 2024