Bundesbank warns of more bankruptcies

Frankfurt German companies were noticeably affected by the consequences of the corona pandemic: The economic shutdown caused one of the biggest economic slumps since the post-war period. In contrast, the effects on the financial system are far less clear.

For the first quarter of 2021, the Bundesbank expects 6,000 insolvencies in its base scenario, compared to 4,700 this year. However, this estimate is subject to some uncertainty. “We cannot rule out that in an unfavorable scenario significantly more companies will become insolvent than currently expected.”

This has significant consequences for banks: if the number of bankruptcies increases, they suffer from loan defaults and higher write-downs. The danger is that they limit their lending as a result and thereby further exacerbate the economic problems during the crisis.

If the pressure on the banks increases due to more bankruptcies, they usually have two options to compensate for this. On the one hand, they can reduce risk in the balance sheet by lending less. From an economic point of view, however, that would be problematic. Because that would make it harder for companies to get credit in times of crisis.

This carries the risk of a downward spiral: the downturn could intensify, which would mean that banks would have to complain about even higher loan defaults and write-downs.

Bundesbank Vice President Claudia Buch therefore advocates a different approach: “Banks should use their existing capital buffers in order to continue to issue appropriate loans.”

In addition to the minimum capital requirements, the institutions have created additional buffers for crises since the financial crisis. In March, the ECB’s banking supervision allowed them to make full use of their existing capital and liquidity buffers so that the financial institutions can keep their credit locks open. They are also allowed to use certain capital instruments that were not previously recognized as core capital to meet the capital requirements.

The actual burdens the banks will face depends on how high the number of bankruptcies ultimately turns out. The Bundesbank’s estimates are based on experience from crises in the past.

The economic consequences of the corona crisis are difficult to predict

However, it is by no means certain whether these can be transferred to the corona crisis. That makes predictions harder. In contrast to the financial crisis, which mainly affected developed economies, the effects of the current pandemic will also have a severe impact on emerging countries and the entire global economy.

In addition, a common pattern of crises in the past was that they initially hit the manufacturing sector particularly hard. In contrast, the corona crisis initially put the service sector – above all restaurants, hotels and airlines – under pressure.

It is also unclear to what extent the crisis will result in structural changes. It is possible, for example, that people will shop more online, hold virtual conferences and work more in the home office.

Bundesbank Vice President Buch referred to the commercial property market in this context. Recently, the prices for office real estate have risen less sharply than in previous years, and prices for retail real estate have even fallen.

More: ECB warns of bad loans running into trillions

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