German regulators have ordered the banks in the country to boost their capital buffers in order to bolster defences against potential slump.

The latest order aims to prepare the banking sector to cover risks which may emanate from slowing economy and shooting domestic property market.

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German bank capital buffer:

The decision was taken by the Financial Stability Board, comprising officials from BaFin, Finance Ministry and the central bank.

Following the order, the German banks need to set aside a combined capital of $5.9bn, reported Reuters.

Starting from 1 July, the German banks will have a 12-month timeframe to implement the order.

Germany’s deputy finance minister Joerg Kukies emphasised that the decision is a precautionary measure, and there is risks pertaining to financial stability.

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The decision comes at a time when growth of lending in the country has outpaced economic growth.

The countercyclical capital buffer will prevent the banks from exploiting their lending services during a potential downturn avoiding further worsening of the situation.

The Finance Ministry expects the German bank to meet the new requirements from existing surplus capital.

However, the move was criticised by the banks. Deutsche Kreditwirtschaft (DK), the industry association, noted that the banks have already qualified in the stress tests that included simulating the lenders through an unexpected economic slump.

DK was quoted by the news agency as saying in a statement: “Today’s decision by the Financial Stability Board to activate the countercyclical capital buffer within one year comes at an inopportune time and is met with incomprehension in the German banking industry.”