German banks robust but may be underestimating risks, Bundesbank says

A sign reads "Bundesbank bunker Cochem - 1964-1988" prior to the bunker's official opening to the public in Cochem

FRANKFURT (Reuters) – Germany’s banks are robust but suffer from weak profitability and may be underestimating the risk of falling asset prices or rising interest rates, the country’s central bank said on Wednesday in a regular stability review.

Although Germany, the euro zone’s biggest economy, has driven the bloc’s recovery in recent years, its economic growth has slowed in recent quarters, and concern is mounting about the weak profitability of its vast but inefficient banking sector.

“In the current macroeconomic setting, there is the danger that market participants might underestimate risks and fail to adequately take into account the possibility of asset prices falling and interest rates rising,” Bundesbank Vice President Claudia Buch said in a statement.

Another concern is that banks are issuing loans with longer maturities, locking in interest rates and making the sector less flexible in responding to rate changes.

Still, the solvency and liquidity of German banks are not in doubt, the Bundesbank said. Property price have risen sharply since 2010, but nothing suggests lending is excessive or lending standards are weakening, the central bank said.

Commercial banks regularly complain that the European Central Bank’s ultra-low interest rates are their chief problem. The ECB has rebuffed those arguments, noting that banks have mostly benefited from the low rates and their real problems were inefficiency and excessive competition.

(Reporting by Balazs Koranyi, editing by Larry King)