Among property risks, BaFin president Mark Branson specifically took aim at the open-ended mutual funds
Mark Branson, the head of Germany's financial watchdog BaFin, was noticeably outspoken last week on an industry podcast and in remarks from the BaFin's own report, warning on both bank profits and the increasing risks in real estate.
Speaking on a podcast from medium Finanz-Szene, Branson said that commercial property was now the "Number 1 risk". "Many banks went overboard in a time of extremely low interest rates. That is why a necessary correction has come, he said.
"The difficult situation...is likely to impact the earnings of the affected banks for alonger period of time and require higher risk provisioning", the BaFin said in a separate report focusing on the main risks facing banks in 2024.
The report, "Risks in Focus 2024" addresses the seven main risks that the regulators have on their agenda this year, including cybersecurity, IT risks, and outsourcing of services by the businesses the BaFin regulates, in addition to property risks.
Among property risks, Branson specifically took aim at the open-ended mutual funds, for both private individuals and institutions. As we report elsewhere in this issue of REFIRE, fund withdrawals have surged in recent months as private savers and investors exercise their right to cash in their units. The trend is less pronounced among institutional investors.
"There is a great reluctance among professional investors to trigger distress sales because they know that this will ultimately destroy value. Professional investors are sitting this out. Only in a few cases - in the case of financing funds such as mezzanine funds, i.e. at the riskier end of the market - have redemptions led to the suspension of unit redemptions." The larger, more broadly diversified funds in terms of use and geography, were holding up better and coping well with redemptions due to their higher levels of liquidity, he said.
But of private investors, withdrawing funds in increasing volumes, Branson said: "This can accelerate, and there are also many more alternatives for investors today than in the past," Since the interest rate turnaround, overnight and fixed-term deposits have been yielding 4% and more interest in some cases, while open-ended funds yield an average of 2% to 3%.
"The structure is such that at some point the funds will no longer be able to generate enough liquidity if the outflows increase too much, and we are keeping an eye on that," said Branson.
