FRANKFURT (Reuters) - Vulnerabilities in the German financial system are building up and risks to growth have increased substantially, the country's central bank said on Wednesday, warning that banks may have insufficient buffers.
Germany has enjoyed its longest expansion since unification but growth is now slowing and the economy contracted in the third quarter, raising questions about the readiness of the euro zone's biggest economy for the next downturn.
"The risks to future economic activity are today skewed to the downside," Bundesbank Vice President Claudia Buch said as the bank presented a regular stability report.
The lengthy expansion has pushed up asset prices, particularly for real estate, which are now 15 to 30 percent overvalued, the Bundesbank added.
While there is no acute need for measures to address the real estate market per se, banks may be overestimating some collateral values and underestimating credit risk.
Banks may also have insufficient buffers if an economic downturn is exacerbated by simultaneous credit defaults, asset repricing and interest rate changes, the Bundesbank added.
"The German banking system has become more vulnerable to an abrupt increase in risk premia and thus in interest rates," Buch said.
"We have evidence to suggest that market participants are tending to underestimate the risks they incur and that they are tending to not charge enough for them," Buch added.
(Reporting by Balazs Koranyi; Editing by Francesco Canepa)