(Bloomberg) -- Germany’s top financial regulator said dozens of smaller banks would see their capital reserves drop below their required levels in a economic shock scenario run as part of a stress test.
More than 50 lenders ran into difficulty in the test, about twice as high as in the last exam two years ago, which wasn’t as tough, said Raimund Roeseler, the head of of banking supervision at BaFin. The watchdog’s test included 1,200 so-called “less significant institutions” and showed the industry as a whole is “well capitalized,” he said.
German banks have improved their financial strength thanks to more than two years of profits from interest rates that remain higher than in much of the last decade. Yet the industry faces challenges in the short-term, such as from soured commercial real estate loans, and oncoming economic risks like higher energy prices or deep changes in the automotive industry.
“It’s still no reason to panic, but a reason to keep an even closer watch on these banks,” Roeseler told reporters, referring to the lenders that dropped below their requirements. “If necessary, we will take supervisory measures to counteract at an early stage.”
The results help set the level of capital that regulators recommend the banks maintain. The test doesn’t include major lenders such as Deutsche Bank AG and Commerzbank AG, which are overseen directly by the European Central Bank.
The banks in the test were able to use derivatives to reduce the impact of the stress in the test, which suggests they have improved their governance and are better prepared for losses, said Roeseler.
“Banks should keep strengthening their capital and not give up their solid positions without need,” Roeseler said. “The economic situation continues to be uncertain.”
The test included a survey that found that 54% of the banks could imagine merging with a competitor in the next years or are already in a merger process.
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