Will German Banks Earn Their Cost of Capital?

Posted: 2 Feb 2017

See all articles by Andreas Dombret

Andreas Dombret

Deutsche Bundesbank

Yalin Gündüz

Deutsche Bundesbank

Jörg Rocholl

ESMT European School of Management and Technology

Multiple version iconThere are 2 versions of this paper

Date Written: 2017

Abstract

In recent years, the German banking sector has overcome major challenges such as the global financial crisis and the European debt crisis. This paper analyses a recent development as a particular determinant of the future outlook for the German banking sector. Interest rates are at historically low levels and may remain at these levels for a considerable period of time. Such levels pose a specific challenge to banks which are heavily dependent on interest income, as is the case for most German banks. We consider different interest rate scenarios and analyse the extent to which they cause a further narrowing of the interest rate margin. Our results indicate that a projected decline in this margin will result in no more than 20% of German banks earning a cost of capital of 8% by the end of this decade. This decline is somewhat alleviated by the fact that German banks can apply a special feature of German accounting standards by using hidden and open reserves.

Keywords: German banking sector, low interest period, profitability, hidden and open reserves

JEL Classification: G21, G28

Suggested Citation

Dombret, Andreas and Gündüz, Yalin and Rocholl, Joerg, Will German Banks Earn Their Cost of Capital? (2017). Bundesbank Discussion Paper No. 01/2017. Available at SSRN: https://ssrn.com/abstract=2910286

Andreas Dombret (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Yalin Gündüz

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Joerg Rocholl

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

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