Will German Banks Earn Their Cost of Capital?

14 Pages Posted: 30 Nov 2018

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: January 2019

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 analyzes 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 analyze 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. However, we show that this decline is alleviated by the fact that German banks can apply a special feature of German accounting standards by using hidden and open reserves. We discuss how these income smoothing tools will provide a cushion that supports short‐ and medium‐term adjustments through a buffer effect.

JEL Classification: G21, G28

Suggested Citation

Dombret, Andreas and Gündüz, Yalin and Rocholl, Joerg, Will German Banks Earn Their Cost of Capital? (January 2019). Contemporary Economic Policy, Vol. 37, Issue 1, pp. 156-169, 2019. Available at SSRN: https://ssrn.com/abstract=3293193 or http://dx.doi.org/10.1111/coep.12266

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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