German regulator urges banks to set aside bumper profits for bad news on the horizon

cnbc.com:

Banks should be setting aside recent bumper profits to provision for clients defaulting on loans as the impact of higher interest rates feeds into the economy, according to the president of the country's regulator.

The banking industry enjoyed a windfall in 2023 as lenders reaped the benefits of central banks' interest rate hikes while keeping deposit rates low.

Central banks around the world tightened monetary policy aggressively over the last two years in a bid to tame soaring inflation, but focus has now turned to when the likes of the U.S. Federal Reserve, the European Central Bank and the Bank of England will start cutting policy rates again.

Though economies have been surprisingly resilient in the face of rising borrowing rates, many policymakers have warned that the impact on households and businesses has yet to be fully felt.

The head of the German regulator (the Federal Financial Supervisory Authority which is better known as BaFin) told CNBC Tuesday that while the shock from rate increases has been «digested in the banking books,» there could be further troubles ahead.

«The difficulties that come from this rate environment for the clients of the banking sector — whether that's in the real estate sector or in the real economy — we haven't seen that flow through yet,» he told CNBC's Annette Weisbach, adding that it «won't be easy» to repeat the profitability expected in 2023 and 2024 as rates remain historically high.

«So firms have to be very wary about provisioning requirements about not only letting the shareholders profit from this good year that they've had, but put as much aside to deal with the costs that are coming because they will come.»

Deutsche Bank, Germany's largest lender, beat third-quarter