Claudia Buch: The Deutsche Bundesbank's 2019 Financial Stability Review

Speech by Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, at the presentation of the 2019 Financial Stability Review of the Deutsche Bundesbank, Frankfurt am Main, 21 November 2019.

The views expressed in this speech are those of the speaker and not the view of the BIS.

This time last year, the economic outlook was slightly more positive than it is at present. Although economic warning signs were already apparent, interest rates were still expected to rise gradually. Unfortunately, this has not come to pass; downside risks to the economy have since emerged worldwide. Germany's export-oriented industry has borne the brunt of this. Robust domestic demand - bolstered by favourable financing conditions and an upbeat labour market situation - has prevented an even greater economic downturn thus far.

Unlike in the previous year, market participants are now expecting risk-free interest rates to remain low in the years to come. A scenario in which interest rates are low for an extended period has therefore become more likely.

From the perspective of financial stability, this means that cyclical risks are continuing to accumulate within the German financial system. These risks are not directly visible as low interest rates are keeping valuations high in some cases, the markets are liquid, and asset prices and loans are still experiencing dynamic growth. At the same time, the vulnerabilities of the German financial system to unexpected macroeconomic developments are growing further.