Directors can provide loans to the company

Banking and financeWill the banking crisis come after the corona crisis?

"Unlike in the financial crisis 12 years ago, we banks were part of the solution and not the problem in this first phase of the corona pandemic. But what's next? And how can we remain part of the solution in the long term?" Deutsche Bank boss Christian Sewing asked this at a bank conference last September. The basic assessment that the banks are not the initial problem in this crisis is shared by economists such as Jan Pieter Krahnen, Director at the Leibniz Institute for Financial Market Research SAFE at Goethe University Frankfurt:

"The situation is very different from the last financial crisis in 2007, 2008, 2010, when this time the state's aid went massively into the industry and basically also to the households, namely through short-time work benefits, and thus to the banks So far, there are hardly any major claims in the loan books, at least not overwhelming ones. And that's the difference. "

(dpa / picture alliance / Justin Lane) Financial crisis ten years ago
On September 15, 2008, the US investment bank Lehman Brothers files for bankruptcy. It was the biggest bankruptcy in history and the beginning of the worst global financial crisis since 1929. The effects can still be felt today.

Because in this crisis the banks have often only passed on loans from the state to the companies, which the company grants through the federal or state development banks, even if this did not work smoothly in all cases. Therefore, they have not yet had to expect major loan defaults themselves. But that will change in the coming months and years. Not only this support is running out. Insolvencies must also be filed as quickly as before the crisis. The representatives of the banks are also aware that they have to arm themselves for possible failures.

Banks have to prepare for future failures

"We expect the number of bankruptcies to rise." A few weeks ago said Gerhard Hofmann, board member of the BVR, the Federal Association of Volks- und Raiffeisenbanken. But the banks are stable enough to be able to shoulder such failures, can be heard from the industry. That may be the case overall. But if you look a little deeper, you can see clear differences between the individual industries.

Companies driving digitization are among the winners, while the retail, gastronomy, culture and tourism sectors are known to be among the losers. But this often includes many small companies. And those, says Markus Demary, economist at the Institute of German Economy in Cologne, are often customers of even smaller banks, mostly savings banks or cooperative banks:

"These are the local banks that they go to because they know them too, of course, while the big companies go to the big banks to get financing, because in the end it is about larger investment sums and larger loan volumes, what smaller banks cannot cope. That of course means that these corona risks, which particularly affect restaurants, i.e. smaller companies, can also arise at the smaller banks in the form of credit losses. "

Regional banks potentially at risk

So could the advantage of customer proximity, which small and regional banks like to emphasize, become a disadvantage in this crisis? Demary does not see this danger:

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"On the one hand, the smaller banks know their local clients very well, and of course they allow a relatively good credit risk picture to be drawn, especially if you have long-term business relationships and thus also if you have the opportunity to just drop by the company look and see how well business is going there. You have more soft indicators compared to such an anonymous capital market business. So that's a certain strength of these smaller banks too, that they can assess the credit risks well. And with that they can Of course, also manage the credit risks well. "

The savings banks are cautious merchants, the President of the German Savings Banks and Giro Association, Helmut Schleweis, recently assured:

"In good years we put aside the risk provisioning that we don't need there so that we can use it when it is needed. And that's why I can also say: Even with the increased risk provisioning that we expect, we are as well equipped to cope with that accordingly. "

BVR board member Gerhard Hofmann confirms this: "The important message from our point of view is of course that we have analyzed and looked through our loan portfolio very, very well, that we do not assume that the risk development will have a decisive impact on the year 2021 with regard to the outlook . That will have an influence, there is no question at all. But from today's perspective we do not see that a situation arises that we cannot cope with or that pulls us down very, very strongly. "

Banking experts such as Jan Pieter Krahnen from the University of Frankfurt confirm that cooperative banks and savings banks are still quite stable. This is due to the respective liability association to which the Volksbanks and savings banks belong:

"That's why, as an economist, I would always see it as an institute. And then, of course, our German Volksbank is a large institution with many small branches everywhere that seem to operate independently, and the same applies to the savings banks. They only come to the customer in their final appearance like independent institutes, but are closely linked in terms of liability. "

The situation of the airlines is also a burden for large banks

The banks that, before the crisis, financed large companies that are now heavily affected by the consequences of the pandemic, such as airlines, face a particular challenge. They are currently burdening, for example, Helaba, the Landesbank Hessen-Thüringen. But their CFO Detlef Hosemann also assured when the balance sheet was presented a few weeks ago that these risks were under control, because many airlines had already started the restructuring of their own accord:

"With a look at our aircraft financing portfolio, we can state that the aircraft fleet we are financing is predominantly made up of types that we continue to assume for long-term use and thus demand."

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That all sounds very reassuring at first. Because in the current year the risk of increasing defaults does not seem to be so great. One reason is the state aid funds that are supposed to help companies through the pandemic, and another is the suspension of the obligation to file for insolvency in the meantime. That is why the real problems may not come to light until the following years. Because in order to compensate for their losses in the crisis, the companies had to go into further debt. That's why it could still be exciting, says Markus Demary:

"What we are facing will be a period of restructuring and debt consolidation in the corporate sector, which means for some companies that they will not be able to invest for a long time until equity is built up again and debt is reduced. Other companies may also have to Register for bankruptcy. Even if this corona crisis has been overcome, it can be assumed that we may then have an estimated one to two years in which companies will have to improve their balance sheets accordingly. "

"Zombie companies" endanger innovation

And that then affects the further recovery of the economy. A lot of energy accumulated during the crisis. This is how Hans-Peter Burghof, holder of the Chair of Banking and Financial Services at the University of Hohenheim, describes energy that needs to develop:

"That depends crucially on whether we actually get significantly more losses through corresponding company failures or whether the rapid growth out of the crisis eliminates many problems that one might have at first glance. I think the banks are strong enough to deal with that to show a certain patience so that we don't turn the tap off immediately to everyone who doesn't pay. But of course there are limits to this. "

Burghof also addresses the problem of the so-called zombie companies, those companies that are dragged through the crisis, although they had previously only had little long-term survival. Sascha Steffen, who is Professor of Finance at the Frankfurt School of Finance & Management, fears that they could damage the innovative strength of the German economy. During the financial crisis, this was particularly evident in the southern European countries:

"That had extremely negative effects on the innovation potential in the industries where they are active. As long as the companies are there, it may just deter healthy companies from simply becoming active here, investing here, and that means that we do less See innovation, less investment in research and development, and then, of course, fewer patent applications. All of this leads to overall productivity in this sector falling, and this then has a strong medium-term impact on economic performance as a whole. "

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As long as there is no large wave of bankruptcies, Markus Demary from the German Economic Institute believes that a larger number of bankruptcies can be dealt with. For this purpose, one can fall back on the protective shield procedure in Germany. If a good recovery plan is presented, then a company can be restructured and reorganized with it. In addition, since the financial crisis there have been rules for the resolution of banks with the aim of preventing a bank that gets into trouble from dragging others along with it. It seems to be working, says Demary:

Banks need more equity

"The possibilities that now exist for banking supervision and bank resolution, that is, early risk identification and, accordingly, the possibility to intervene, the shielding of loss-making business from customer business, and what there is still to be done, has taken a lot of risks out of this banking sector, which of course this means that even in the event of a new crisis, it is possible to react much better here. "

At first glance, the banks seem well equipped to actually continue to be part of the solution. Sascha Steffen from the Frankfurt School of Finance doubts whether it will stay that way. Together with the Bonn economist Moritz Schularick and Tobias Tröger from the Goethe University in Frankfurt, he already calculated a year ago that European banks would need around half a trillion euros of equity - if there were to be a significant recession and loan defaults. With every further lockdown, this risk increased:

"Of course you can do the math back and forth as you like, but I think the end result is the same: the banks are not stable enough to simultaneously grant new loans and absorb the losses that could arise from this crisis. "

In the crisis, the focus is primarily on the obvious loan defaults and the recession, says Steffen. But the previous problems such as dealing with low or negative interest rates have not disappeared, he warns, and Hans-Peter Burghof also sees it this way:

"The phase of low interest rates is combined with overregulation. And there we also have great risks that the banks will not be able to do what they should do for the economy."

Overbanking: There are too many banks in Germany

The strong regulation paralyzes the banks on the one hand, and on the other hand they try to increase their profitability in the low interest rate phase. It is still far too low, especially in Germany, and the competition is tough. Because the number of banks is still too high. Banking experts have been criticizing this for years. Jan Pieter Krahnen from the University of Frankfurt:

"The realization of the last few years is that it doesn't happen that easily, that the institutes that are there nevertheless have a stamina that often results from their network character, so that the actual clean-up philosophy behind the European banking supervision is simple So far, I see the big risk. Ultimately, our banks are not profitable enough to be able to compete successfully in the long term. "

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In order to make ends meet, the risk then increases that the institutes will ignore possible risks, fears banking expert Steffen.

Government bonds in the portfolio as a risk factor

Even if the banks in Europe have had to hold significantly more equity in order to cover certain risks since the financial crisis, the current regulation still ignores one major risk: government bonds. Banks can buy them without having to deposit collateral, explains Markus Demary from the German Economic Institute:

"When a bank grants a loan, it has to back it up with equity, but government bonds, that is not necessary. That means the bank can acquire government bonds with borrowed money alone."

A dangerous development. The supervisory authority knows that, the monetary policy knows that, and the politicians know that too. The solution is obvious: if banks add government bonds to their portfolios, then they should deposit the same equity capital for them as they do for other loans. Because they take government debt securities into custody. But the regulators still shy away from this. Bundesbank President Jens Weidmann said a few weeks ago that an agreement has not yet been reached in the Basel Committee, the body responsible for international banking regulation. A dangerous hesitation:

"You just can't find a political consensus within Europe to do that." Says Sascha Steffen from the Frankfurt School. There is a good reason for this: it is easier for governments to get into debt if the banks, especially those in their own country, finance that debt for them by adding the government bonds to their portfolios. That was already the case before and during the sovereign debt crisis a good ten years ago, when these risks were particularly evident in highly indebted countries such as Italy, Spain and Greece. In the meantime, states are once again borrowing heavily to deal with the crisis and the banks are taking action, says Steffen:

"If the banking sector is not stable enough, it leads to banks going into business that may be more bets than anything else, not lending enough to the real sector, and then the economy is just slow to develop that can lead to more bankruptcies in the near future. "

Unstable equilibrium due to low interest rate policy

The incentive to purchase the government bonds is great. Because in order to be able to buy them, you borrow money from the European Central Bank very cheaply or even at negative interest rates. How shaky this construct is, however, became apparent in March of last year at the beginning of the pandemic, when ECB President Christine Lagarde said the ECB was not there to keep the interest rates of the countries low. Even if she qualified this statement shortly afterwards, the reaction on the financial markets was clear. The yields on Spanish and Italian bonds initially skyrocketed because investors also know that the risk of a state bankruptcy increases with higher bond yields. And that would also have repercussions on the banks with bulging government bond deposits.

ECB boss Christine Lagarde defends the low interest rate policy (Hannibal Hanschke / dpa)

So it is an unstable equilibrium in which the banks operate during this time.As long as the ECB maintains the low interest rates, there is no danger from this side. The institutes are still complaining loudly about the low or negative interest rates. But the low interest rate should be an incentive for them to give companies more loans, says Hans-Peter Burghof from the University of Hohenheim:

"Overall, at least in Germany, the banks do not have the problem that they had too much credit demand, but would have liked to have given more loans to good companies. That is what they are actually there for, where they actually have fun."

If they have enough capital for that. However, they would be bad banks if they hadn't learned to deal with the low interest rate environment, says Jan Pieter Krahnen from the Leibniz Institute for Financial Market Research SAFE. The banks normally live off the interest rate difference between the deposit and loan interest, but other means can also be chosen.

"One is negative investment interest, savings interest, the other is simply fees that are taken from savers as a substitute for interest in order to be able to achieve adequate income in this way. And the banks should be able to do that. In other countries they can do it Yes, too. We have a situation with over-banking, we have too many banks, the competition is very fierce, and insufficiently cost-covering business is being carried out and non-cost-covering business is being carried out at this point, then we would not have over-banking if that were the case would be like that. "

Reform of the banking sector is still pending

The situation in Germany is special in this regard. After all, there have not yet been any major mergers other than in the savings bank or cooperative sector. Overall, the banks should be able to shoulder the direct consequences of the corona crisis. But that doesn't apply to everyone. Individual institutes like Deutsche Bank have now worked their way out of the deep valley, but Commerzbank, for example, is still looking for a sustainable business model years after the financial crisis. A fundamental renewal is still pending - within the industry, but also in terms of supervision. Because you act in Germany and Europe as you have always done in recent years: you manage to get by, says Sascha Steffen.

"As long as things work somehow, why should you have problems that you know are there subliminally, why should you tackle them then? That is something that may not have a positive effect right now, but rather in the future, if maybe politicians are also no longer in power. But so I believe that we see all sorts of problems that are going to arise and then you try to solve them. "

There is a lack of courage to undertake a lasting adjustment that would bring real stability. As long as the corona crisis continues, there will probably not be.