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Downturn could threaten German financial stability: Bundesbank

The alert comes on the same day as data showing Europe's top economy went into reverse in the three months to September, shrinking for the first time since early 2015.

The Deutsche Bundesbank. Picture: facebook.com

FRANKFURT - A sharp economic downturn could hit weak spots in the German financial system that have developed in times of low interest rates and strong growth, the Bundesbank (central bank) warned Wednesday.

The alert comes on the same day as data showing Europe's top economy went into reverse in the three months to September, shrinking for the first time since early 2015.

Blamed on one-off factors such as new tougher emissions tests slowing the mighty car industry, the slowdown is so far not troubling economists and policymakers.

But in its annual financial stability report, the Bundesbank pointed out that a graver economic downturn could be amplified through financial markets, with risks to the global economy such as trade tensions with the United States and Brexit also casting a shadow.

"In recent years the German financial system has become more vulnerable" as players have neglected the risks from non-repayment of loans or possible changes in asset prices and interest rates, vice-president Claudia Buch said in a Frankfurt speech.

"Every single market participant should build up their capacity to resist unexpected events."

She highlighted "positive" developments too, including the fact that many banks have increased the capital cushions they keep on hand to help weather economic shocks.

But German banks along with UK institutions were among the worst performers in a recent round of "stress tests" by European regulators, which put lenders through their paces in a simulated economic crisis.