The Bundesbank stated that Germany's banks are becoming increasingly vulnerable to an overvalued housing market, and that financial authorities should push lenders to build up capital buffers.

Germany reduced the so-called countercyclical buffer for banks to zero at the onset of the pandemic, but now that economic growth is strong and bank lending is rapid, banks should be obliged to hold more capital in case of a rainy day, the central bank said.

Bundesbank Vice President Claudia Buch said, "the countercyclical capital buffer should be built up again early on."

Bundesbank – German Culture

The buffer, which is currently at 0, was set at 0.25% of banks' overall risk exposure prior to the pandemic, but current credit levels suggest that an even greater level may be required, according to the Bundesbank.

The Bundesbank said that this buffer does not explicitly account for the booming residential property market, which requires careful monitoring and potential regulatory action.

Property prices continue to rise, and evidence indicates that further increases are on the way, leaving real estate overvalued as price and rent growth outpaces income growth. "Price exaggerations in the residential real estate market have tended to increase further," said the bank. "Bundesbank projections place them between 10% and 30% in Germany in 2020."

This means that banks may be overestimating the value of loan collateral, leaving them vulnerable to substantial losses in the event of a price adjustment. The Bundesbank stated that banks are vulnerable to interest rate hikes since a major portion of their long-term lending is fixed rate, notably in the case of mortgages.