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A new financial record raises many questions in the Corona crisis

M.In the middle of the corona crisis, there are two records to report: “Not only has the German target balance reached the highest level in history at 1.136 trillion euros – the volume of refinancing loans from the Bundesbank to German banks has also reached a high of 341 billion euros.” says the Osnabrück economist Frank Westermann: “I find the second record even more remarkable than the first.” What do you mean? These refinancing loans are loans to banks in Germany that can be obtained from the Bundesbank against collateral. The total volume of these loans in Germany rose from 75 to 341 billion euros in the course of the corona crisis – by more than a quarter of a trillion euros. “The increase in refinancing credits is also remarkable because the parallel increase in the target balance actually shows that a lot of liquidity flows into Germany during the crisis,” says Westermann.

Behind the rise in the target balance are on the one hand the bond purchases by the central banks of the Eurosystem and on the other hand capital flight to Germany. “Under these circumstances, it is remarkable that the German banks do not now have too much liquidity – on the contrary, they are taking out such large amounts of additional loans from the central bank.” Refinancing loans have also increased in the southern European countries during the corona crisis, but especially the increase in France and Germany is striking. “This is different from the financial and euro crisis, when it was mainly southern European countries whose national central banks gave their banks high refinancing credits,” says Westermann. Refinancing loans are now also increasing in the periphery, but the increase is greater in the core countries.

30 billion for Deutsche Bank

It’s about a lot of money. For comparison: In Germany, during the corona crisis, 80 billion euros in federal liquidity support have been called up by companies – but 266 billion euros have been made available by the Bundesbank for banks.

The Osnabrück economist explains that, from his point of view, there are three possible interpretations for this development. Either the “TLTRO” long-term loans from the Eurosystem with their negative interest rates are so attractive for German banks that they simply take out these loans in order to earn money from the negative interest rates. However, this is countered by the fact that it is not so easy for the banks to reinvest this money without paying negative interest themselves. “The second possibility would be for the German banks to look ahead to supply themselves with liquidity for the rest of this year because they fear high loan defaults – out of caution,” says Westermann. The third possibility would be that there are already banks with serious liquidity bottlenecks.

If you look at which banks are particularly active in refinancing loans, then in any case it is not the two large German banks. “Deutsche Bank has raised around 30 billion euros in refinancing loans with a cash balance of 177 billion euros as of September. So she didn’t have to, ”says Westermann. Commerzbank raised 34 billion euros with a cash balance of 80 billion euros. There remained more than 200 billion euros, which should have been borrowed from other banks.

Development almost reversed like in the euro crisis?

If the sharp rise in refinancing loans, especially in the core countries of the monetary union, is in fact a high need for liquidity, even if only out of caution, then there will be a remarkable reversal at the time of the financial and euro crisis, says Westermann: now at least looks like a lender of last resort, a lender of last resort – exactly what was seen in southern Europe’s central banks in the earlier crises. “

Risks could be associated with the high increase in refinancing loans. “In contrast to the bond purchases, there is a joint liability of all euro countries for refinancing loans,” says Westermann. “If something goes wrong with the sharp increase in refinancing loans in Germany during the corona crisis, the southern European euro countries must also be liable.” When it comes to bond purchases, however, every national central bank that buys their country’s bonds also bears the risks of price losses.

Risks from the target system would arise primarily if the euro were to break apart – on the other hand, risks from refinancing loans would arise if the euro stayed together.

Westermann says it all reminds him of an observation by Berkeley economist Barry Eichengreen. In the old American currency system between 1913 and 1975, the regional central banks compensated for major bottlenecks in payment transactions by transferring their gold reserves from one to the other for accounting purposes – this had at least vague parallels to the current system in Europe. They stood up for one another, especially in severe cases of liquidity crises, such as a storm on bank counters. It was observed that these movements did not always go in one direction – sometimes one regional central bank ran into liquidity bottlenecks, sometimes another, says Westermann: “Eichengreen pointed out five years ago that there were surpluses in Europe too and a shortage of liquidity can theoretically be reversed. “

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