Will German banks earn their cost of capital?

Andreas Dombret, Yalin Gündüz and Jörg Rocholl

No 01/2017, Discussion Papers from Deutsche Bundesbank

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.

Keywords: German banking sector; low interest period; profitability; hidden and open reserves (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-acc, nep-ban and nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: WILL GERMAN BANKS EARN THEIR COST OF CAPITAL? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:012017

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