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Bundesbank warns against risks from low interest rates

FRANKFURT (Reuters) - The Bundesbank is increasingly concerned that the low interest rate environment is fuelling risks for the German financial sector and it stands by to act if needed, it said on Thursday.

Germany's central bank said in its annual financial stability review that a closer integration of the European banking system would help shield governments from having to foot the bill for banks' troubles in future, but this was no excuse to fall behind on necessary reforms.

"The debt crisis is not yet over," said Bundesbank Vice President Sabine Lautenschlaeger, who is also in charge of banking supervision on the board.

Her fellow board member Andreas Dombret said the low-interest-rate environment was placing a growing strain on the German financial system.

"The experience of other countries has shown that a prolonged period of low interest rates can result in price bubbles," he said.

Housing prices, especially in German cities, have risen significantly over the past few years and the Bundesbank said it expected a further price increase of around 9 percent in these areas this year.

Still, this development did not pose a "serious risk" to financial stability, the Bundesbank said, but it would keep a close eye on the sector.

"One thing is certain: as soon as we see a risk to financial stability, we will act," Dombret said.

(Reporting by Eva Taylor)