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Germany feeling pinch of low interest rates

14 November 2013, 15:55 CET
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(FRANKFURT) - Banks and insurers in Germany are increasingly feeling the negative side-effects of ultra-low interest rates, the German central bank or Bundesbank warned on Thursday.

"The low-interest-rate environment ... is placing a growing strain on the German financial system," said Bundesbank board member Andreas Dombret.

"Until now, financial stability in Germany has benefited because low interest rates and generous liquidity supply helped ease tensions on the financial markets," the bank wrote in a new financial stability report.

But now the tide was turning.

Life insurers were finding it much more difficult to generate guaranteed returns and low interest rates were eating away at their financial buffers.

German banks, too, faced "greater pressure on profitability," Dombret said.

In addition, there was an increasing danger that investors would take ever greater risks in their hunt for yield, the central banker warned.

"On the international financial markets, there is an increasing risk that the search for yield will result in excessive behaviour and will give further impetus to the shadow banking system," Dombret said.

Another danger was that the the financial markets would get too used to low interest rates.

"The more the markets orientate themselves on current financial conditions in their risk evaluation, the higher the costs will be when interest rates change," the Bundesbank said.

Last week, the European Central Bank shaved a further quarter of a percentage point off its key "refi" refinancing rate to bring down to a new all-time low of 0.25 percent.

Bundesbank president Jens Weidmann was one of the ECB council members who voted against the move.

Weidmann had already cautioned on Wednesday that a prolonged period of low interests could be risky.

Dombret agreed.

"Low interest rates have without doubt helped to stabilise the situation. But now the time must actually be used," he said.

"By governments to consolidate their finances and to strengthen competitiveness. By banks to clean up their balance sheets, review their business models and reduce risky portfolios."


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