FRANKFURT, Nov 14 (Reuters) - The Bundesbank said on Wednesday the euro zone debt crisis is still the number one risk to German banks and insurers, and that central bank measures to counteract it pose their own dangers.
The debt crisis, entering its fourth year, has hit financial institutions in southern European countries particularly hard, but has also caused problems for banks in the euro zone's core countries, including Germany.
The German central bank, in its annual financial stability review, said the situation had not improved from last year.
"The risks to the German financial system are no lower in 2012 than they were in 2011," it said in the report.
The Bundesbank repeated its line that central bank actions cannot solve the debt crisis and highlighted the dangers of the European Central Bank's measures to ease tensions.
"The side-effects of short-term stabilisation measures could leave a difficult legacy for financial stability in the medium to long term," board member Andreas Dombret said in a statement.
Low interest rates, high liquidity provision and a potential bubble in the German real estate market could pose threats in the future, the central bank said.
To aid struggling economies, the ECB has cut its interest rates to record low 0.75 percent and offers banks unlimited amounts of loans at that rate.
Much of that money is flowing back to more stable northern European countries, especially Germany, which has performed much better than its peers.
Housing prices in large German cities have risen well above inflation recently as savers look to avoid keeping their money in savings account at negative real interest rates.
"The experiences of other countries show that precisely such an environment of low interest rates and high liquidity can encourage exaggerations on the real estate markets," Dombret said.
The Bundesbank saw regulatory costs and tougher competition for deposits and lending weighing on banks' profits in Europe's largest economy.
"Credit institutions should therefore review their business models," Bundesbank Vice President Sabine Lautenschlaeger said.
"Consolidation should not be off-limits either."
The shadow banking system, which is not regulated, also poses a risk to German financial stability, even though it is relatively small in the country itself.
On a more positive note, the Bundesbank said that German banks had lowered their leverage ratios and achieved higher capital ratios. (Reporting by Sakari Suoninen, editing by Paul Carrel)