The German system is very heterogeneous, with a range of business models and a large number of smaller banks and insurers. Its asset management industry is the third largest in the EU while its sovereign bond market is a safe haven and benchmark for fixed income instruments globally, a report by the IMF said.
Germany is also home to two global systemically important financial institutions, Deutsche Bank and Allianz, as well as to one of the largest global central counterparties, Eurex Clearing. This adds a layer of "international interconnectedness" that has to be taken into account, said Michaela Erbenová, the IMF mission chief who managed the assessment.
"Outside influences can affect developments in Germany, and what happens in the German financial system can have major repercussions around the world. This potentially global impact makes risk management, intense supervision of systemic institutions and the close monitoring of their cross-border exposures particularly important," Erbenová said.
The IMF carries out analysis of systemically important financial markets every five years. While this year's assessment was based on the previous findings, "in many ways it was a completely different task", Erbenová said.
Reforms in the euro area have created the single supervisory mechanism (SSM), changing the way banks are regulated and supervised, and the single resolution mechanism for dealing with failing banks. A transformation of the German financial sector is also underway, with many institutions looking at changes to their business models, she said.
The IMF has been "positively impressed by what has been achieved in a relatively short period of time since the SSM came into being. The supervision of German banks is now more quantitatively based, and new approaches are being developed for direct assessment of credit risk, for example," Erbenová said.
"But we have also suggested a number of improvements, in corporate governance, internal audit and compliance functions as well as strengthening regulation of related party risk and major acquisitions," she said.
The European Central Bank's interest rate of -0.4% on banks’ deposits held at eurozone central banks is affecting German banks, reducing banks' profitability from retail operations that tend to have "a large number of branches and high overhead costs", Erbenová said.
"So far banks have proven unwilling, or even legally unable, to pass on the negative interest rates to depositors, while their assets have recently started to reprice to lower interest rates. This is squeezing their interest margins leading to profitability concerns," she said.
The German insurance sector is likewise characterised by a large number of institutions operating in a very competitive environment, "with a traditional life insurance model offering guaranteed rates that are relatively high compared to prevailing interest rates. This makes the insurance sector vulnerable to low interest rates over the medium- to long-term," Erbenová said.
A new solvency framework has brought new pressures for insurers in Germany's low interest rate environment, she said, but insurers "have been able to maintain significant loss absorption capacity, not least thanks to measures since 2011 that tightened German regulatory requirements exactly in view of the structural impact of such low interest rates".
US treasury secretary Jack Lew has called for the IMF to retain its global economic leadership and, through the International Monetary Fund (IMF), be more aggressive in policing exchange rates and members' commitments.
Speaking in April, Lew said that US leadership of the global economic system has produced economic successes over the past 70 years or more. Sustaining that economic leadership and adapting it to the challenges of our time is critical to future US and global stability and prosperity, he said.