Loan defaults paralyze German banks: economy in acute danger!

Loan defaults paralyze German banks: economy in acute danger!

The German banking system is facing an alarming rise in non-performing loans, reaching the highest level since the financial crisis in 2024. This is reported by the fr.de. Specifically, the number of loans classified as non-performing in Germany increased by 24.9% compared to the previous year, which is significantly higher than the European average of just 1.1%.

The main reasons for this dramatic increase are a weakening economy, increasing corporate bankruptcies and the ongoing crisis in the commercial real estate sector. In 2024, 21,812 corporate insolvencies were recorded, the highest level since 2015. This development will be further reinforced by the expiry of state aid during the Corona period, which is likely to lead to a further increase in insolvencies.

The pressure on the commercial real estate market

The commercial real estate market is under considerable pressure: Falling property values, a lack of follow-up financing and rising interest rates have caused many property owners to struggle. Demand for office space is also suffering a decline, partly due to the ongoing work-from-home trend. As a result, many commercial properties are vacant, which further exacerbates the economic situation.

The European Central Bank (ECB) warns of increasing risks in loans to small and medium-sized companies and to owners of commercial real estate. Although NPL rates in Europe are currently at historically low levels, early indicators point to an impending worsening of loan defaults. This could weaken the capital base of individual banks and further restrict lending.

Increased financing risks for companies

The situation for German companies has worsened significantly in terms of the risk of insolvency. A report from BaFin underlines that the automotive industry and its suppliers in particular are significantly affected by the current situation. Here a combination of high energy costs, inflation and rising wages meets a transformation into a climate-neutral economy.

In addition, many banks have tightened their lending standards, particularly in risky industries such as hospitality, retail and real estate. These stricter guidelines have made access to capital increasingly difficult for young companies, medium-sized companies and investors. From the beginning of 2023, companies also asked for fewer loans, which further exacerbated the already tense situation.

Anticipatory measures and risks

BaFin is planning closer monitoring of high-risk credit institutions and is considering special audits. The authority will expand its data analysis capabilities to implement an early warning system for future risks. Other potential risks being monitored include interest rate increases, real estate market corrections, international financial market corrections, cyber attacks and money laundering prevention.

Overall, fiscal and monetary policy freedom of action has declined, and German economic output experienced a slight decline in 2023. This decline is expected to have serious consequences for companies, especially in areas that were already severely affected by the coronavirus pandemic. Analysts warn of rising loan default rates in particularly sensitive sectors such as catering and manufacturing.