The German banking regulator Bafin does not consider the difficulties of banks to deal with the abrupt and significant rise in interest rates to be over yet. "Since March, the global financial system has been undergoing a kind of real-time stress test," said Bafin President Mark Branson on Tuesday at the annual press conference of his authority, which is subordinate to the Federal Ministry of Finance. Branson doubts that this turbulent phase is already over. "Stress phases often develop in spurts," said the Briton, who moved from the Swiss financial regulator Finma to the top of Bafin in August 2021.

Hanno Mußler

Editor in business.

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In March, the regional banks Silicon Valley and Signature went to their knees in the US because customers withdrew their deposits due to uncovered losses with bonds. Subsequently, Credit Suisse suffered from such high capital outflows in Switzerland that its biggest competitor UBS was forced to buy by the Swiss government. A few days ago, the major US bank J. P. Morgan took over the stumbling asset manager First Republic. A positive surprise is how little hedge funds and other unregulated market participants (shadow banks) have been affected by this stress in the financial system so far, admitted Branson, who has often expressed concern about the risks of shadow banking in the past.

"Speculative attack" under investigation

The fact that Deutsche Bank saw itself as the victim of a speculative attack on March 24 because its share price had collapsed by 15 percent and premiums for credit default swaps (CDS) skyrocketed, Branson and his colleagues essentially assessed as follows: The suspicion of manipulation of the CDS market is still being examined. But in principle, market prices have an important signal function that should not be switched off if they are inconvenient. The rules for short selling, which had been temporarily suspended under Branson's predecessor Felix Hufeld, for example in the Wirecard case, would also not have to be changed.

For Branson, one of the right lessons from the recent bank distress is to "tighten up" the banking regulation adopted in response to the financial crisis of 2007/08. He complained that there are still no minimum capital requirements for interest rate risks under the international Basel III rules. Liquidity buffers are at least as important. Here, Bafin, which is primarily responsible for the small and medium-sized 1200 or so German banks, demands individual surcharges.

Changes in liquidity risk

Following the bankruptcy of Lehman Brothers in September 2008, international banking supervisors had assumed that retail savings deposits were a particularly stable source of financing for banks. As a result, banks today have to hold enough money in liquid assets to meet their net obligations for 30 days (liquidity coverage ratio). The 30 days as an assumption are no longer appropriate for Branson today. This is because customer funds are flowing out much faster than before, made possible by the greater use of online banking and influenced by the faster exchange of bank customers via social media. "In the case of German institutions, there are no rational reasons for a liquidity crisis. But there are also irrational fears," Branson said. This psychological factor should not be underestimated.

Branson also warned German banks not to "be too greedy" when it comes to paying interest on savings deposits. He could understand that it was lucrative for savings banks and banks to grant loans at higher interest rates after the recent rise in interest rates and to still pay comparatively low interest rates on deposits. But this increases the risk that customers will withdraw their savings and invest in higher offers elsewhere.