andreas dombret : major challenges facing germany's savings banks speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the retirement of dr rolf gerlach from his position as president of the westfalen - lippe savings bank association, bochum, 31 march 2017. * * * 1 introduction finance minister dr schauble mr fahrenschon president muller dr gerlach ladies and gentlemen it is more than apt that so many of us should have gathered here today in bochum to pay tribute to dr gerlach as he leaves office. for my part, i intrinsically associate the city of bochum with herbert gronemeyer. he even dedicated a song to the city which, among other things, he describes as " no great beauty, for work ’ s lined your face ". even if the song does not seem so at first glance, it is first and foremost a declaration of love for his hometown. gronemeyer goes on to sing " you don ’ t like wearing make - up – you ’ re an honest place, [ … ] your heartbeat ’ s of metal it hammers out through the night. " speaking for myself, i can ’ t help seeing some of dr gerlach ’ s traits in the lines of this song. but i ’ ll come back to that later. during his time in office dr gerlach has always focused his attention on the substance of the matter in question. bearing this in mind, i would like to follow his example and shall therefore begin my speech by outlining the challenges germany ’ s savings banks currently face. 2 savings banks face an array of major challenges... no matter where you might focus your attention as a board member of one of germany ’ s savings banks, be it old or new competitors, the regulators or your institution ’ s cost calculations, there is pressure to act. but perhaps the greatest challenge you ’ re going to face lies somewhere down the road. for many of the problems that are currently the subject of intensive debate at savings bank conferences around the country will not impact in full until a later date. i refer, in particular, to the prevailing low - interest - rate environment. lower interest margins started to impact on savings banks back in 2016, doing so in the form of reduced interest income. at that time, these institutions were still able to counter this effect, chiefly by raising net commissions received and cutting administration costs

is to say claims with a maturity of more than five years – at german banks has risen from 60 % in 2007 to just under 70 %. the ratio among institutions in the savings bank and cooperative bank sector is especially high. at 83 %, it is significantly higher than the 47 % ratio for commercial banks. thus, we are in a situation in which banks and savings banks are holding many long - term, lowyielding investments in their books. moreover, valuations for many investments are extremely high. by contrast, risk provisioning in the german banking system is very low, at 0. 6 % of total assets. this makes banks vulnerable to unexpected macroeconomic developments, such as an abrupt hike in interest rates or an unforeseen deterioration in economic activity. at the same time, they have shortened the maturities of their liabilities. the ratio of overnight deposits to total liabilities towards non - banks has risen within ten years from 36 % to around 60 %. an important aspect in this context is that customers are parking their funds in deposits because interest rates on investments are so low. it is difficult to predict how these funds will be shifted as soon as more attractive investments become available. historical experience gives us a rough idea, but in view of the extreme situation of the current low - interest - rate environment it is of only limited use as a guide for the future. the bottom line here is that we see an increased vulnerability of banks to changing interest rates. this is why we have been keeping a very close eye on the topic of interest rate risk. our low - interest - rate survey 2017 focused on this very issue, simulating the implications of possible shocks for small and medium - sized banks and savings banks. one scenario entailing an abrupt rise in the yield curve by 200 basis points highlights banks ’ short - term vulnerability. in such a scenario, profits would initially plummet by around 55 % before staging a recovery in the medium term. this means that the speed at which interest rates are raised is crucial. the stress test carried out as part of our low - interest - rate survey combined several risks at once. besides an abrupt rise in the yield curve of 200 basis points, it simulated a simultaneous increase in credit and market risk. on aggregate, in such a case the tier 1 capital ratio would drop from around 16 % to around 13 %, which is to say by some three percentage points. yet a more detailed look reveals the positive impact of substantially improved capital levels