MNI POLICY: Markets Unready For Hard Brexit: Bundesbank's Buch

By Luke Heighton

     FRANKFURT (MNI) - Lack of market preparation for a hard Brexit poses a

serious risk to Germany's economy, the vice president of Germany's Bundesbank

said Wednesday, following the publication of the bank's annual Financial

Stability Review.

     Negotiations between London and Brussels were being "watched closely,"

Claudia Buch said, as she warned against assuming "everything will turn out

well."

     "Everyone needs to be prepared for the potential risks of a hard Brexit,"

she said.

     However there were few if "any" major threats to the European financial

system as a whole, head of banking supervision Joachim Wuermeling added, despite

alternative markets being unlikely to offer the same liquidity or prices as

London.

     Here are key points from the report:

     -- Vulnerabilities in Germany's financial system have risen - in part due

to global trade threats and uncertainty - despite a sustained period of strong

economic expansion and low interest rates.

     "An unexpectedly sharp economic downturn could expose these

vulnerabilities, and contagion effects in the financial system could amplify the

downturn," the 2018 Financial Stability Review concluded, "while the probability

of such a scenario coming to pass has increased."

     -- Household and corporate insolvency rates remain "very low." However,

banks' existing capital buffers "might not be sufficient if, on the heels of a

downturn, risks from credit defaults, asset repricing and interest rate changes

were to materialize simultaneously, for instance. These risks could reinforce

each other and trigger a credit crunch".

     -- Asset valuations remain high, with German house prices overvalued by

15-30%. Risks from overestimating real estate values "give cause for concern",

and reliable risk-assessment information is lacking. However credit growth is

not unusually high, and there are no strong signs of credit standards being

eased.

     -- In the event of an economic downturn, an abrupt rise in interest rates

could simultaneously put many institutions under pressure. The interaction

between credit risk, real estate risk and interest rate risk has created a need

for macroprudential action, from warnings and recommendations to macroprudential

capital buffers.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com