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Ladies and gentlemen,

It gives me great pleasure to welcome you today to the Bundesbank symposium.

This is already the 24th event of its kind – but I'm quite sure none of the previous symposiums were held during a period of upheaval like the one we find ourselves in now. The global economy has been hit by severe shocks in the past few years, the geopolitical and macroeconomic situation is uncertain, and episodes of stress in financial markets in March of this year are casting their shadow. A transformation is needed in the real economy to effectively mitigate climate change and deal with the structural challenges of our time. All of this has implications for our liberal economic and social order which go far beyond the financial sector.

Banks cannot directly influence these conditions, but they need to adapt to them. You see, how banks and supervisors react is extremely important: robust banks that have a firm handle on their risks and a sound capital base are vital contributors to a successful transformation. However, especially during periods of upheaval, we cannot rely solely on banks' risk management. Strong supervision that preserves financial stability and gives society confidence in the stability of banks is more important than ever.

It is precisely because supervisors act on behalf of society that we need to engage in constructive and comprehensive dialogue with all groups of society. "Banking supervision in dialogue" – the motto of this series of events – is therefore defined very broadly. Our aim is to deepen this dialogue. Going forward, we intend to reach out even more to relevant groups of society alongside stakeholders in the industry, to explain and discuss what supervisors can and should do, to talk about how we can tackle the challenges of our time.

With that in mind, I would like to discuss three theses with you today:

1. The economy is undergoing structural change which is impacting on the real economy and financial sector alike.

2. Banks have a key role to play in a successful transformation – though this means that they are exposed to risks that require sound risk management and strong supervision.

3. We need public discourse on the role of banks in the transformation process and what is expected of supervision and regulation.

1 The economy is undergoing structural change which is impacting on the real economy and financial sector alike.

German and European banks have emerged fairly unscathed from the episodes of stress in international markets in March 2023. Bank profits have risen recently, and capital and liquidity ratios are stable. Since the global financial crisis, stricter regulation has been implemented and supervision enhanced; in particular, we have a functioning Single Supervisory Mechanism (SSM (Single Supervisory Mechanism)) in the European Union. In recent years, we have adjusted the focus of supervision in order to address risks even more effectively and to identify problem institutions at an earlier stage. But banks have most certainly also benefited from the extensive fiscal and monetary policy measures of recent years, which have absorbed shocks.

The sound situation therefore must not detract from the fact that vulnerabilities have built up in recent years. After many years of stable growth, low inflation and low interest rates, banks' risk provisioning had fallen sharply. Credit risk was low. The economy has since been hit by severe shocks. Inflation and interest rates have risen significantly, and uncertainty is high. Interest rates have already gone up by more than we had assumed in past adverse scenarios.

Supervisors have therefore taken action to mitigate the impact of these vulnerabilities. Interest rate risk is a key priority. Around two-thirds of the institutions supervised by the Bundesbank are required to meet additional capital requirements in order to counter higher interest rate risk. Deposit rates currently still stand at an average of 0.22% and have thus risen less sharply than central bank policy rates. If deposits were to be shifted out of low-interest sight deposits into higher-interest time deposits, this would reduce banks' interest margins. Off-site supervisors urge the institutions they supervise to model interest rate risk conservatively, for example by assuming an average maturity of less than five years for deposits without a set interest rate fixation period. 

The results of the EU (European Union)-wide stress test conducted by the European Banking Authority ( EBA (European Banking Authority)) and the ECB (European Central Bank)'s parallel SSM (Single Supervisory Mechanism)-wide stress test will also provide further insights into bank resilience at the end of July. A baseline and an adverse scenario will be examined over the period from 2023 to 2025. The adverse scenario simulates an aggravation of geopolitical tensions, leading to a severe contraction of GDP (Gross Domestic Product) amid persistently high inflation and high interest rates.

We are facing fundamental structural changes in the economy, which will require a high degree of resilience among banks. Looking ahead, banks will have to operate in a much more volatile and risky environment. Resilience – the ability to withstand shocks, to function during crises and not to collapse under pressure – is essential for structural change to succeed.

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