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Will German banks earn their cost of capital?

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  • Dombret, Andreas
  • Gündüz, Yalin
  • Rocholl, Jörg
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.

Suggested Citation

  • Dombret, Andreas & Gündüz, Yalin & Rocholl, Jörg, 2017. "Will German banks earn their cost of capital?," Discussion Papers 01/2017, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:012017
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    References listed on IDEAS

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    9. Ramona Busch & Christoph Memmel, 2016. "Quantifying the components of the banks’ net interest margin," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(4), pages 371-396, November.
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    12. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2013. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2013_23, Max Planck Institute for Research on Collective Goods.
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    2. Bhardwaj, Chandan & Axsen, Jonn & McCollum, David, 2022. "Which “second-best” climate policies are best? Simulating cost-effective policy mixes for passenger vehicles," Resource and Energy Economics, Elsevier, vol. 70(C).
    3. Buchholz, Manuel & Schmidt, Kirsten & Tonzer, Lena, 2020. "Do conventional monetary policy instruments matter in unconventional times?," Journal of Banking & Finance, Elsevier, vol. 118(C).
    4. Emblemsvåg, Jan, 2022. "Wind energy is not sustainable when balanced by fossil energy," Applied Energy, Elsevier, vol. 305(C).
    5. Dombret, Andreas R. & Foos, Daniel & Pliszka, Kamil & Schulz, Alexander, 2019. "What are the real effects of financial market liquidity? Evidence on bank lending from the euro area," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 152-183.
    6. Andreas R. Dombret & Roman Goldbach, 2017. "Rising House Prices and Ultra-low Interest Rates: A Recipe for a New Banking Crisis?," Economic Affairs, Wiley Blackwell, vol. 37(2), pages 254-270, June.
    7. Urbschat, Florian, 2018. "The Good, the Bad, and the Ugly: Impact of Negative Interest Rates and QE on the Profitability and Risk-Taking of 1600 German Banks," Discussion Papers in Economics 56535, University of Munich, Department of Economics.
    8. Shala, Iliriana & Schumacher, Benno, 2022. "The impact of natural disasters on banks' impairment flow: Evidence from Germany," Discussion Papers 36/2022, Deutsche Bundesbank.
    9. Sylwester Kozak, 2021. "The Impact of COVID-19 on Bank Equity and Performance: The Case of Central Eastern South European Countries," Sustainability, MDPI, vol. 13(19), pages 1-15, October.
    10. Ulf Hübenbecker, 2024. "Is nobody interested in the future of banks? a scoping literature review on the state of the debate," Management Review Quarterly, Springer, vol. 74(3), pages 1283-1326, September.
    11. Tekam Oumbe & Chouafi Nguekam & Takoulac Kamta & Ongo, 2020. "Retrospective Analysis of the Application of the ECBs Key Interest Rates to the Macroeconomic Indicators of the CEMAC," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 8(3), pages 141-151, September.

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    More about this item

    Keywords

    German banking sector; low interest period; profitability; hidden and open reserves;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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