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Germany’s Bundesbank Warns of Unrealized Losses at Banks

The Bundesbank Eurosystem Financial Stability Review 2023 warns about banks’ unrealized losses. They are the loss of value of bonds held by a bank, due to yields lower than the new debt issues. A consequence of interest rate hikes, such losses are “unrealized” because, courtesy of the European Central Bank (ECB), those bonds are currently accounted at face value instead of market value.

Speaking of Frank Heid, from the Bundesbank’s Directorate General Financial Stability, the report says: “The proportion of savings banks and credit cooperatives with unrealized losses in their banking books has increased significantly. Due to varying accounting rules, the banks have not fully shown the losses in value but have built up unrealized losses because prices of the securities have fallen below the purchase price, Heid continued. Overall, bank capitalization is stable, but the impact of rising interest rates has yet to be fully transmitted to the financial or corporate sectors. As a result, banks’ interest expenses will rise in the future, and credit risk in the corporate sector, for example, is expected to increase.”

Back in the summer, ECB banking supervisor Andrea Enria had minimized the risk of unrealized losses for the banks of the 20 Eurozone countries that use the euro as their currency, saying it was just €75 billion. However, this does not sound credible, as the U.S. Federal Deposit Insurance Corporation (FDIC), for instance, reported that unrealized losses for U.S. banks in Q3 had grown to $684 billion—over nine times the Eurozone banks.

Recently, the head of BaFin, the German stock exchange regulator, said that they are particularly watching 20 German banks.