Profitability Has Become a Bad Word: Bundesbank Official
While banks must be "credible" and have capital buffers in place that meet European regulation, they also must remain profitable and make solid earnings to prevent them from taking unnecessary risk, the German central banker responsible for financial stability told CNBC.
Andreas Dombret, member of the executive board of the Deutsche Bundesbank defended German banks, describing them as "much safer than they used to be," despite estimates from German regulator BaFin that show the nation's top lenders are 14 billion euros ($18 billion) short of the capital needed to meet incoming Basel III banking rules.
"German banks are much safer than they used to be. They have increased and improved their capital ratios, but I have to say it is important that banks have a solid base to make earnings. Profitability has become a bad word in some circles," said Dombret.
"Nevertheless banks have to earn a certain level – if they don't do that they would have to take higher risks and that is not what we want, so we are interested that there is always a certain level of earnings that makes them safer," he said.
Commerzbank, Germany's second-biggest bank had its debt rating downgraded on Tuesday by ratings agency Standard & Poor's on concern the lender will struggle to generate sustainable earnings.
"We think it will take the bank longer than we previously anticipated to manage down its considerably high risk in its non-core loan books. In our opinion, Commerzbank will have an increasingly tough time generating stronger, more stable, and sustainable earnings in core businesses," S&P said.
The central banker, who is also responsible for risk control at the Bundesbank said German banks are not at any disadvantage to any other banks and is positive on the growth prospects for banks in the second half of this year and in 2014.
"We had a pretty tough winter in Germany which means that what we foresaw in the first quarter is now coming in the second half of the year. This was not only a German phenomenon, you see it also in the rest of Europe and the euro zone," he said.
(Read More: Germany on Track for Solid Q2 Recovery: Bundesbank)
"We expect a pretty strong next year 2014 in the economy both in Germany and in the euro zone, we are likely to leave recession and enter into a growth pattern again,"
"Overall, Bundesbank is not changing its forecast and we are pretty confident that we will have a good year and an even better year next year," he added.
—By CNBC's Jenny Cosgrave; Follow her on Twitter @jenny_cosgrave.