FRANKFURT (Reuters – Germany’s banks face increasing vulnerability to an overvalued real estate market. The Bundesbank stated Thursday that lenders should be forced to create capital buffers.

Germany reduced the countercyclical buffer banks had to have to zero in the wake of the pandemic, but the economy is growing rapidly and lending has increased quickly, so the central bank suggested that they need to be forced to keep more capital to prepare for the unexpected.

Claudia Buch, Bundesbank Vice President for Capital Markets, stated that the countercyclical capital buffer must be rebuilt early.

Although the buffer is now set at 0.25 percent of total bank risk exposure prior to the pandemic, current credit levels indicate that a higher level might be required, according to the Bundesbank.

According to the Bundesbank, this buffer does not take into consideration the boom residential real estate market. It requires close monitoring and the possibility of regulators taking action.

Real estate continues to climb and indicator suggest further growth. As rents and prices rise faster than incomes, real estate is overvalued.

According to the bank, “Price exaggerations on the residential realty market have tended increase further.” According to Bundesbank, they will be between 10% and 30% for Germany in 2020.

This could mean that banks might underestimate the worth of their loan collateral and are therefore vulnerable to price adjustments, which can result in large losses.

The Bundesbank stated that banks are vulnerable to rising interest rates because large amounts of their long-term loans are at fixed rates. This is especially true for mortgages.