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Bundesbank Vice-President Buch: “The situation is distorted”

Ms. Buch, in every crisis it says: “This time is different.” What is different in the Corona crisis than in 2008?

In contrast to the financial crisis, this time all countries in the world are affected, albeit to different degrees. And it is a health crisis that is having a massive impact on the real economy. In the global financial crisis, the financial sector was the culprit.

This time banks are not causing problems?

We don’t have a crisis of confidence like we did in 2008. In the spring, it became apparent relatively quickly that the financial sector was working, there was no credit crunch. This was due to the expansive fiscal and monetary policy. The financial sector has been protected so that the massive shock in the first phase did not reach it that much. Write-downs and write-downs on loans have so far been very low. That should change in the near future.

Will the number of bankruptcies skyrocket if the suspension of filing soon expires?

The situation is distorted at the moment. Bankruptcies do not appear in the statistics until proceedings are completed. At first glance, the numbers still look good – but only because many proceedings are being postponed. It will not stay that way and sectors will be affected to varying degrees.

Who will it hit especially hard?

In relative terms, we expect a strong increase in manufacturing. In terms of services, the increase is likely to be even stronger. However, we are starting from a historically low level – during the financial crisis the number of bankruptcies was around 8,000 per quarter. In any case, increasing bankruptcies, but also business de-registrations, will lead to value adjustments at the banks.

If one reads a few passages of the latest financial stability report, one could sum up pointedly: The big end may still come.

We also consider such a case, but not as a base scenario, but as an adverse scenario. This would put the financial system under greater stress: the banks would have to realize unexpectedly high losses and write-downs. That would put their equity under pressure. Banks could then cut back on their business and lend less to stabilize their capital ratios. As a result, there would be a threat of negative contagion to the real economy. That is exactly what we want to prevent. Thanks to the reforms since the financial crisis, banks now have larger capital buffers. They can use these to extend loans.

How much lockdown can the real economy and financial system still take?

There are a lot of uncertainties. In the summer we developed a basic scenario in which we took into account a certain ups and downs. That would be easily manageable by the financial system. The banks have sufficient buffers. But banks and public authorities should also prepare for more negative developments and dealing with higher bankruptcies.

Are the banks stable enough that taxpayers don’t have to prepare for the worst like 2008?

A lot has happened since then. We have a lot more capital buffers in the system. Large banks had to build up additional equity. In addition, new institutions have been established for the resolution and restructuring of banks in distress. All of this protects tax funds. It is also important, however, that the new rules are applied if banks go into difficulties.

Do the banks weigh themselves in a false sense of security because for many years there have been very few bankruptcies and thus loan defaults?

I wouldn’t say that the individual banks have become negligent. You have to realize that the current situation is far from good.

People are now less disciplined than they were in spring. Does that also apply to banks in terms of bonuses and dividends?

Basically it’s similar: today you want to do beautiful things, go out to eat, meet friends or travel. With this joint renunciation, we are investing in the stability of the health system. It is similar in the financial system: distributions are postponed to invest in the stability of the financial system. There is so much uncertainty that banks should do whatever it takes not to weaken their resilience now. They can always pay dividends later if the worst hasn’t happened. It doesn’t work the other way around: once dividends have been paid out, they don’t bring them back.

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