The debt ratings agency Moody's Investors Service provided a reminder Friday that the vaunted German economy has a major weakness: its banking system.
In a report, Moody's warned that German banks suffer from meager profits, rising risk and insufficient reserves to absorb losses. The rating agency reaffirmed the negative outlook it has assigned to German banks since 2008.
The poor state of German banks seems surprising considering that the country's economy has heldup fairly well to the euro zone crisis. In addition, German banks benefit from the country's status as a haven from the turmoil and are able to borrow money atmuch lower rates than counterparts in other European countries. There isno real estate bubble and households are not over-indebted.
German banks did, however, invest heavily in countries like Spain and Italy before the crisis, because they could earn more profits there than at home. Four years after the financial crisis began, they remain exposed to problemsin those countries, Moody's said.
In addition, Moody's said, Germany still has too many banks in relation to the size of the country. The oversupply pushes down lending rates and profits.
"Intense competition and low interest rates are causing margin pressure that will likely further erodealready-weak bank revenues and profits," Moody's said in a statement early Friday.
The combination of low profits and high leverage"will make it difficult for many German banks to copewith major (unforeseen) losses," Moody's said.
