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[FRANKFURT] Germany's banks can and must do more to counter the effects of rock bottom interest rates on earnings, the head of the country's financial watchdog, Bafin, said on Tuesday.
While most banks still have sufficient financial buffers to ride out the low interest rate phase, their earnings are likely to slump considerably the longer cheap credit continues, and even a rate rise would not bring quick relief, Bafin President Felix Hufeld said in the text of a speech. "Banks have possibilities to steer against (low rates); they should use them," Hufeld told a New Year's reception.
For example, banks could cut costs and revamp their business models to expand non-interest rate dependent sources of revenue. They should also make sure they are demanding adequate prices for their services and reinforcing their capital base in a timely way, Hufeld said. "Doing nothing and just waiting for the spectre of low interest rates to pass would amount to - for some banks at least - death by instalments," he said.
Germany's biggest lender Deutsche Bank is currently executing a strategic revamp, while the country's second biggest lender, Commerzbank, is awaiting the instalment of a new chief executive to clarify its strategic direction in the coming years.
Bafin will check closely whether German banks have sufficient equity capital to cover risks stemming from interest rate changes, Hufeld said, as part of the European Central Bank's supervisory review and evaluation process (SREP), which evaluates banks' ability to manage their risk.
Low interest rates have also made life difficult for German life insurers, who have been required to build up special reserves to ensure they can meet guarantees given to policy holders.
Mr Hufeld said the additional interest rate reserve, or ZZR, rose by more than 10 billion euros (US$10.84 billion) last year to reach more than 32 billion euros. "It will also continue to grow strongly in the coming years," he said.
Insurers have complained about the burden and urged remediation.
Bafin was keeping an eye on developments and would review, if necessary, the calibration of the ZZR, Mr Hufeld said.