- "We don't have a global banking crisis at the moment, but we have a nervous time and a kind of real life stress test for parts of the system."
- Data released last week showed that in the euro zone, banks have started to tighten conditions for credit.
- Speaking over the weekend, 92-year-old investing icon Warren Buffett also highlighted that the commercial real estate market has started to experience the consequences of higher borrowing costs.
Germany's financial regulator on Tuesday warned that the country's banking system is undergoing a real-life stress test amid the current volatility, also predicting significant weakness for the commercial property sector.
The banking sector has been under the spotlight since March with the collapse of Silicon Valley Bank and the rescue of several other embattled lenders. Pressures facing the sector have intensified as many central banks push up their benchmark rates, leading to specific market dislocations.
Mark Branson, president of the German regulator BaFin (Federal Financial Supervisory Authority), told CNBC that Germany has seen the same impacts from higher rates as many other nations around the world.
He said that the German banking system "has taken some pain," but highlighted that there is "no systemic danger" and the financial system has managed to absorb the impacts of higher rates well.
"We don't have a global banking crisis at the moment, but we have a nervous time and a kind of real life stress test for parts of the system," he told CNBC's Annette Weisbach.
Generally speaking, higher interest rates should be a positive for banks' balance sheets. However, problems can arise when banks take on additional risk and fail to keep up with a continued and sharp increase in rates.
As such, the volatility seen in the United States has raised questions about which European lenders might be at risk too. Deutsche Bank shares came under pressure in late March, for example, amid speculation of its balance sheet stability. Credit Suisse ended up having to be rescued by its rival UBS.
Data released last week showed that in the euro zone, banks have started to tighten conditions for credit, while borrowers have also demanded less credit. These dynamics could translate into a further economic slowdown.
"We don't know that the rate hikes part of the cycle is passed and we haven't seen all the effects of the interest rate rise that we've already had in the markets and valuations," Branson said Tuesday.
In fact, European Central Bank President Christine Lagarde said last week that there is likely more ground to cover in raising rates.
But it is not just the banking sector that's adapting to a new environment of higher rates after more than a decade of ultra-low borrowing costs. The real estate market, tightly linked to the banks, is also heavily impacted by moves in interest rates.
"When we look at real estate, where we have most focus is on commercial real estate, not just German," the head of BaFin said.
"There's stress to come in that market," he said, adding that there could be some credit risk issues in that part of the market.
Speaking over the weekend, 92-year-old investing icon Warren Buffett also highlighted that the commercial real estate market has started to experience the consequences of higher borrowing costs.
This is because higher interest rates make it more costly for borrowers to purchase places and to refinance their loans. At the same time, more flexibility in working from home has also changed some of the demand for commercial property.