Deutsche Bundesbank warns of rising risks to German banks and insurers

Germany’s financial system remains resilient, but rising credit risks, elevated asset valuations and vulnerabilities in real estate financing could expose banks and insurers to substantial losses, according to the Deutsche Bundesbank’s Financial Stability Review 2026.

The central bank warned that German insurers face losses through three channels if financial markets decline: securities held directly, investments in funds and additional losses caused by fund asset sales.

• German insurers could lose 1.4% of securities investments under a scenario involving a 7% equity market decline and a 1% bond market decline.
• Almost 40% of new residential mortgage lending in Q2 2026 involved loan-to-value ratios above 90%, increasing potential losses from defaults.
• Major German banks face an estimated $97 bn shortfall in high-quality US dollar liquid assets under a 30-day liquidity stress scenario.

Its analysis found that a relatively moderate market shock, involving a 7% decline in equities and a 1% fall in bonds, could reduce investment fund net assets by 3.5% and insurers’ securities investments by 1.4%.

The Bundesbank also identified weaknesses in residential mortgage underwriting and US dollar liquidity management at major German banks. It estimated that large institutions would collectively need approximately $97 bn in additional high-quality US dollar liquid assets to withstand a standard 30-day outflow scenario.

German insurers face losses from investment fund exposures

The Bundesbank examined the financial connections between insurance companies and investment funds to assess how a stock market correction could spread through the German financial system.

Insurers hold substantial investments in securities and fund units, leaving them exposed to both direct market losses and indirect effects transmitted through investment funds.

“The insurance sector is particularly relevant here, as it is a major investor in the capital markets and holds substantial fund units,” the Bundesbank said.

The central bank identified three channels through which insurers could incur losses. The first is the decline in the value of securities held directly. The second arises from reduced valuations of investment fund holdings.

A third source involves forced asset sales by funds responding to investor redemptions. These transactions can intensify price declines and generate additional losses for insurers holding similar assets.

“The indirect losses resulting from contagion and amplification effects from the fund sector are substantial,” the Bundesbank warned.

The findings illustrate why investment fund liquidity and cross-sector financial connections are important to insurance sector stability, even when the initial market correction is relatively limited.

High financial market valuations increase correction risks

The Bundesbank identified ambitious valuations in global equity and corporate bond markets as a potential source of financial instability, particularly in the US technology sector.

Investor expectations for AI-related earnings have contributed to elevated valuations, while credit risk premia remain low. These conditions leave markets vulnerable to disappointing corporate results or an escalation of geopolitical tensions.

“The potential for setbacks is considerable,” said Michael Theurer, Member of the Executive Board of the Deutsche Bundesbank.

A sharp repricing of technology stocks or corporate bonds could spread to other asset classes, increasing market volatility and making financing more expensive for businesses.

The review also highlighted risks associated with rising government debt. Weak economic growth, higher borrowing costs, demographic pressures and increased defence spending are limiting fiscal flexibility in many countries.

European banks remain exposed to sovereign debt through their balance sheets.

Theurer called for measures encouraging banks to diversify these holdings, including capital surcharges for concentrated sovereign exposures or explicit concentration limits.

The Bundesbank considers the combination of weak economic growth and rising public debt particularly problematic for financial stability.

German banks face rising corporate credit risk

German companies are experiencing pressure from weak profitability, elevated financing costs and increasing insolvencies.

The share of non-performing loans has risen since the middle of 2025, indicating deterioration in parts of banks’ corporate credit portfolios.

Despite these developments, German banks continue to benefit from strong net interest income, while their aggregate capital and liquidity positions remain sound.

The Bundesbank warned that a significant deterioration in economic and financial conditions could increase credit defaults and put pressure on bank profitability.

The central bank also identified weaknesses in the effectiveness of capital buffers at systemically important institutions.

Low risk weights and restrictions affecting the practical use of certain buffers could limit banks’ ability to absorb losses during periods of severe stress.

Theurer argued that regulatory requirements should be simplified to make capital buffers more effective. “A buffer that cannot be fully used by banks in a stress event only performs its stabilising function to a limited extent,” he said.

The Bundesbank maintained that existing macroprudential capital buffer requirements remain appropriate, including the countercyclical capital buffer and the sectoral systemic risk buffer covering residential real estate loans.

German mortgage lending standards raise financial stability concerns

Residential mortgage lending remains a source of vulnerability despite the gradual reduction of risks accumulated during the period of exceptionally low interest rates.

In Q2 2026, almost 40% of new residential mortgage lending by volume involved loan-to-value ratios exceeding 90%. For nearly 11% of new lending, the mortgage amount exceeded the value of the property being financed.

High loan-to-value lending leaves banks more exposed to losses if borrowers default and the underlying property cannot cover the outstanding debt.

The Bundesbank also observed that a substantial proportion of new mortgage borrowers spend a large share of their income on debt servicing.

Although German households remain financially resilient overall, high repayment burdens reduce their ability to absorb income losses or unexpected expenses.

Commercial real estate presents separate concerns. Non-performing loans have continued to increase, although the pace has moderated.

Property transaction volumes remain low, and valuations face potential downward pressure from higher interest rates and asset sales by investment funds.

The Bundesbank warned that these factors could prolong weakness in the commercial property market.

German banks face a $97 bn shortfall in US dollar liquidity buffers

The Bundesbank warned that Germany’s largest banks may lack sufficient US dollar liquidity to withstand a prolonged funding stress scenario.

Under a regulatory stress test assuming 30 consecutive days of US dollar outflows, the banks would collectively need approximately $97 bn in additional high-quality liquid assets denominated in US dollars to cover the projected outflows.

The estimated $97 bn represents an aggregate shortfall in US dollar liquidity buffers under the specified stress scenario, not an actual funding deficit or realised loss.

The finding is consistent with concerns raised by other European financial regulators about banks’ reliance on US dollar funding.

The assessment identifies a potential vulnerability in banks’ foreign-currency liquidity positions, even where their overall capital and liquidity ratios remain sound.

Private credit and real estate funds increase systemic risks

Risks have also increased among non-bank financial intermediaries, particularly investment funds.

German open-end real estate funds have experienced persistent investor outflows since mid-2023. Some have suspended redemptions or introduced restrictions to manage liquidity pressures.

Forced property sales could further weaken commercial real estate valuations, especially in a market already experiencing low transaction activity.

Investment funds have also become more interconnected with banks, insurers and pension funds, creating additional channels for financial stress to spread.

The Bundesbank warned that increasing connections between funds and other financial institutions could accelerate the transmission of losses and liquidity shortages across the financial system.

International private credit funds represent another concern. Their role in financing has expanded, but the Bundesbank considers the sector insufficiently transparent.

Theurer called for stronger reporting requirements in private credit, improved data exchange across Europe and more flexible tools to address systemic liquidity risks in investment funds before they intensify.

AI and cyber threats add to financial stability risks

Beyond conventional market and credit exposures, the Bundesbank identified artificial intelligence and hybrid threats as additional sources of operational risk.

Greater digitalisation increases financial institutions’ dependence on interconnected technology systems and critical service providers.

AI applications and hybrid threats could increase the frequency or severity of cyber attacks affecting essential financial services.

These operational vulnerabilities add to the challenges facing supervisors responsible for monitoring risks across banks, insurers and non-bank financial institutions.

Theurer called for reliable financial data, usable capital buffers and a macroprudential framework capable of addressing risks associated with an increasingly digitalised financial system.

The Bundesbank concluded that German banks, insurers and investment funds have so far managed their financial pressures relatively well.

Maintaining that resilience will require adequate credit risk provisioning, effective capital requirements and stronger safeguards against liquidity and contagion risks in non-bank finance.