The vice-president of Germany's central bank has a warning for lenders as insolvencies rise

Germany's major banks need to increase their provisions for non-performing loans, as corporate insolvencies and credit risks mount, according to Bundesbank Vice-President Claudia Buch.

Europe's largest economy has been dubbed the "sick man of Europe" by some economists, after entering a technical recession earlier this year while economic activity faces further downward pressure from a collapse in construction.

Lawmakers in Berlin are meanwhile scrambling for solutions to a developing budget crisis that could threaten the future of the country's coalition government.

Like the rest of the euro zone, the German economy is dealing with a rapid rise in interest rates, as the European Central Bank took its main deposit facility from a record low of -0.5% in September 2019 to a record-high of 4% in September 2023.

"I will say that, actually, the financial sector dealt quite well with this increase in interest rates. At the same time, the full effects are not yet visible, so they haven't really worked their way through the balance sheets of the banks, and this is why we caution the banks as usual," Buch told CNBC's Annette Weisbach on Wednesday.

"Resilience is really of utmost importance at the current juncture. The banks are highly profitable at the moment, and I think it's good if they use this profitability to increase their resilience — sufficient capital, sufficient liquidity but also investments into IT to shield against cyber risks."

German banks enjoyed a strong third quarter, with Deutsche Bank posting a net profit of 1.031 billion euros ($1.13 billion) and Commerzbank more than tripling its net profit from the previous year to 684 million euros.

Buch nevertheless noted that provisioning for non-performing loans did not increase as substantially as the central bank would have liked, given the sharp rise in interest rates and the "very uncertain environment" for the economy.

"Provisioning has increased a bit, but if you compare it to historical averages, it is still at a relatively low level and the same actually holds for corporate insolvencies, so corporate insolvencies which actually came down over the past 20 years have increased slightly, but are still way below historic averages," she said.

"In all likelihood, given the structural change that we have, given the uncertainty that we have around us, corporate insolvencies are likely to increase, credit risk is likely to increase, and this is why we — on both sides, from the macro-prudential side and the micro-prudential side — really make banks aware of these risks and urge them to increase whatever they can, their resilience."