Banks in the stress test: How interest rates, regulation, and digitalisation are transforming the financial world in 2025
Do you believe that the recent interest rate increases have sustainably secured the earnings situation of the banks? The reality for 2025 is far more complex and entails significant risks that extend well beyond the interest margin. This article analyses the four key challenges that will determine stability and profitability in the German banking sector.
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The topic briefly and concisely
Falling Returns: Despite short-term interest gains, banks face a potential revenue decline of around 20 billion euros by 2026 due to risk costs and weak economic conditions.
Regulatory pressure: From 2025, Basel IV and DORA will increase capital and compliance requirements, which will restrict profitability and lending.
Property risks: Value adjustments in real estate are a major risk as German banks hold large exposures in this sector and bankruptcies in the construction sector are on the rise.
The German banking landscape is at a turning point. While the interest rate change brought record profits to institutions in 2023, dark clouds are gathering for 2025. According to a study by Oliver Wyman, net income after risk costs could slump by around 20 billion euros by 2026. At the same time, new regulations like Basel IV and the Digital Operational Resilience Act (DORA) are forcing multi-billion investments in capital buffers and IT security. For property owners and investors, understanding these tectonic shifts is crucial, as they directly influence lending and the valuation of collateral. The stability of the banks now depends on how they weather this storm of economic weakness, regulatory pressure, and digital disruption.
The new interest rate reality: A double-edged sword
The ECB's interest rate reversal initially seemed like a blessing, boosting the interest income of European banks by 82 percent. However, this positive effect is deceptive and only short-lived. The Bundesbank is already warning of 'tougher times', as the positive effects diminish and will manifest in more loan defaults by 2025. On the flip side, refinancing costs for the institutions have significantly increased.
At the same time, the uncertain economic situation is severely dampening the demand for financing. A survey by EY among 120 credit managers shows that 67 percent expect a significantly weaker demand for loans in the coming months. Simulations by the Bundesbank revealed that the interest surplus would have been a third lower if the banks had passed on the higher interest rates to savers more quickly. This dilemma of rising costs and declining new business substantially erodes margins and increases the financial risks.
This development leads to an increased need for precise risk provisions. Although the return on equity for German institutions rose to 6.94 percent in the third quarter of 2023, it does not reflect future dangers. The impending economic downturn, which according to the Council of Economic Experts led to a 0.2 percent decline in economic output in 2024, will drive up default rates further. The next challenge is already looming in the form of tightened regulatory requirements.
Regulatory Pressure: Basel IV and DORA as Efficiency Barriers
From 2025, new regulatory requirements will lead to further burdens. The finalisation of Basel III, often referred to as 'Basel IV', necessitates significant changes in capital requirements. A central element is the so-called 'Output Floor', which limits the RWA (Risk-weighted Assets) advantages from internal bank valuation models. By 2030, this floor will rise to 72.5 percent, which could particularly increase the cost of financing for SMEs and real estate projects.
These new rules are intended to ensure financial stability, but they also require banks to greatly increase their capital reserves. Although the 50 largest European banks have already improved their core Tier 1 capital ratio to an average of just under 14 percent, Basel IV presents a real test. The complex requirements necessitate considerable investments in IT and reporting systems, making risk management for real estate even more challenging.
Additionally, from January 2025, the EU's Digital Operational Resilience Act (DORA) will come into force. This regulation sets new, stringent standards for IT risk management and security in the event of system failures. Banks must demonstrate that their IT risk management frameworks and incident reporting processes meet the highest standards. This not only ties up resources but also increases the pressure on operational efficiency in a market environment characterised by digital attackers. Another risk factor becomes more pressing: the situation in the real estate markets.
Property Markets in Transition: The Growing Risk in the Financial Statements
BaFin has identified corrections in the real estate markets as one of the main risks for 2025. The situation in the German commercial real estate market remained tense in 2024, leading to significant write-downs at some institutions. This development is critical as German banks held around 57 billion euros in real estate funds alone by the end of 2023.
The crisis among project developers and in the construction sector, where bankruptcies increased sharply in the first half of 2024, further exacerbates the situation. Every non-performing loan increases the pressure on bank balance sheets and requires a reassessment of the collateral. The great danger lies in a downward spiral: falling property values lead to higher capital requirements, which in turn restricts lending and further depresses market prices. Here, detailed valuation documentation is essential.
In this uncertain environment, a rapid and objective assessment of properties becomes a strategic necessity. Do you need a neutral, data-driven evaluation of your property's market value without conflicts of interest? Auctoa's ImmoGPT chat provides you with an initial analysis in just a few minutes. The increasing digitization poses further, profound challenges for banks.
Digitalisation: Between Investment Pressure and Competition
Digitisation is one of the biggest challenges and at the same time an opportunity for banks. On one hand, competition with FinTechs and neobanks forces massive investments. According to a BearingPoint study, European banks increased their technology investments to 4.9 per cent of their revenue. On the other hand, there is a threat of rapid loss of significance: an analysis by Oliver Wyman predicts that traditional institutions could lose up to 15 billion euros in revenue to digital attackers by 2035.
The focus is clearly shifting towards mobile-first experiences, as the banking app becomes the most important touchpoint for many customers. Here are some of the key developments that banks need to prepare for:
AI Assistants: Development from simple chatbots to fully-fledged digital financial advisors.
Embedded Finance: Integration of banking services into third-party offerings.
Digital Identities: Secure and simple verification processes as a competitive advantage.
Open Banking: Increased collaboration with third parties to create new customer experiences.
The true battle is no longer just fought between traditional banks, but against global technology corporations. To succeed here, institutions need to accelerate their technological transformation while ensuring cyber security, which directly leads to the requirements of the DORA regulation. Proactive management of these aspects is essential for the future.
Conclusion: Stability through proactive actions and data-driven decisions
The year 2025 presents a critical challenge for German banks. The straightforward profits from the interest rate turn are over, while the risks from loan defaults, real estate market corrections, and cyber threats are increasing. Regulatory requirements such as Basel IV and DORA further increase capital and cost pressures. To succeed in this demanding environment, banks must sharpen their risk management, enhance their efficiency, and adapt their business models to the digital reality. For owners and investors, this means that the demands on the quality and valuation of securities will rise. A precise, AI-supported real estate valuation, as offered by Auctoa, is no longer a luxury but a crucial tool for risk minimisation and strategic planning.
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Additional useful links
The Bundesbank offers comprehensive financial stability reports that provide insights into the current situation and risks of the German financial system.
A press release from the ECB Banking Supervision informs about current developments and decisions in the field of European banking regulation.
The Bundesbank provides detailed statistics on deposit and lending rates in Germany.
PwC explores in an article how banks use digital ecosystems and drive their technological transformation.
A guest contribution from the Bundesbank discusses the impact of digitalisation on the future of the banking sector.
Current press releases from the ECB offer insights into monetary policy decisions and economic analyses.
FAQ
What does the change in interest rates mean for my assets and loans in the long term?
In the long term, the change in interest rates means that banks may become more cautious when granting loans, and conditions could tighten. For savers, deposit interest rates might rise, though often not to the same extent as loan interest rates. Carefully monitoring market developments is crucial for your financial planning.
How can I, as a property owner, respond to the new risks posed by the banks?
As a property owner, you should have the value of your property assessed proactively and objectively. A current, data-driven valuation from Auctoa enhances your negotiating position with banks, whether for follow-up financing or a sale. Additionally, it helps you better evaluate the security values set by the bank.
Is my money still safe at the bank?
Yes, deposits at German banks are protected by the statutory deposit insurance up to 100,000 euros per customer and bank. The new regulations, such as Basel IV, are precisely aimed at further increasing the resilience of the banks and making the financial system as a whole more stable.
Is it getting more difficult to obtain a mortgage?
Yes, it is likely that lending will become more restrictive. Due to increased risks and stricter regulations, banks need to scrutinise more carefully who they lend to. Comprehensive and professionally prepared documentation, as well as a realistic property valuation, are becoming increasingly important.
Can an AI evaluation like the one from Auctoa help me at the bank?
Definitely. An independent, AI-supported evaluation provides an objective market value, which can serve as a neutral second opinion. This helps you verify the bank's assessments and ensures transparency. With ImmoGPT, you can quickly get an initial assessment and enter discussions more informed.
