Let me thus zoom in and describe the changing patterns of banks’ assets and liabilities. 2.1 Changing patterns of bank assets On the asset side of banks’ balance sheets, we have seen a shift towards relatively riskier loans. In German banks’ loan portfolios, loans to relatively weak firms now account for a fairly large share.
At the end of 2021, loans to firms with an above-average debt overhang ratio made up 73% of banks’ credit portfolios [Figure 3]. [12] One plausible explanation is that firms with stronger financial fundamentals have used other sources of finance such as market finance or retained earnings. At the same time, given the historically low interest rates, financial institutions have been “searching for yield”.