The extended duration of the low interest rate environment is having an increasingly significant impact on the banks' books as well. The capital resources of German institutions are still relatively sound, but the longer interest rates remain low, the more difficult it will become for the institutions to generate adequate income and to maintain a sufficient capital buffer in the long run. In many cases, this can only be achieved through increased maturity transformation. This applies above all to banks that operate primarily in the deposit and lending business.

Interest rate risk

What is more, the longer interest rates stay low, the greater the banks' interest rate risk in the banking book (IRRBB) will become as a result of the increased maturity transformation. Again, this hits institutions with a broad customer base in the deposit and lending business particularly hard. Significantly more than 50% of all credit institutions face increased interest rate risk – and the trend is rising.

Pillar I of the regulatory framework does not currently specify general capital requirements for interest rate risk in the banking book. In 2016, BaFin therefore began, as part of the Pillar II supervisory review and evaluation process (SREP), to examine whether the approximately 1,600 institutions under its direct supervision have set aside sufficient own funds to allow them to cushion this and other risks.

BaFin subjected the first 319 banks to the SREP process in 2016. Banks that received a SREP notice by the end of 2016 will have to increase their own funds by an average of 0.89 percentage points for interest rate risk in the banking book. To ensure equal treatment, institutions that were not notified of their capital requirement by BaFin in 2016 are required as from 1 January 2017 to cover at least the IRRBB quantified by BaFin. The legal basis for this is provided by a general administrative act of 23 December 2016, which has been in force since the beginning of 2017. As soon as one of the banks receives a final SREP notice with its individual capital requirement, the general administrative act will cease to apply to this bank.