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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
     "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
     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
     -- 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:
--MNI London Bureau; +44 203 865 3829; email: