German banks’ forecasts under scrutiny in new Bundesbank research

TLDR:

An analysis by the Bundesbank has questioned the effectiveness of the forecasting by Germany’s small and medium-sized banks. The discussion paper, titled “How good are banks’ forecasts?”, uses data that the banks were required to submit under the country’s low-interest rate environment surveys. The authors, Lotta Heckmann and Peter Wezel, found that these banks were overly optimistic in their predictions and underestimated their risk exposures. They argued that this could undermine financial stability in Germany.

The authors found that the small and medium-sized banks tended to underestimate their risk exposures. They also found that these banks were overly optimistic in their loan loss forecasts, failing to adequately account for potential losses in the event of an economic downturn. The authors argued that this optimism could lead to a mispricing of risk and potential losses for these banks.

The analysis also found that these banks were less likely to revise their forecasts in response to changing economic conditions. This lack of responsiveness could leave these banks vulnerable to unexpected shocks and increase the likelihood of financial instability.

The Bundesbank’s analysis raises concerns about the ability of small and medium-sized banks to accurately assess and manage their risk exposures. The authors argued that these banks need to improve their forecasting models and risk management practices in order to ensure financial stability.

Overall, the study highlights the importance of accurate and realistic forecasting for banks, particularly in an environment of low-interest rates and economic uncertainty. The authors called for greater attention to be paid to the quality of banks’ forecasting practices in order to ensure the stability of the financial system.