The banks are still doing well. But the economic consequences of the coronavirus could trigger a new financial crisis – and who can help then?


The financial crisis is often used as a yardstick for the economic extent of the corona crisis

This time the crisis could spillover from the real sector to the financial sector

Bank watchers are still optimistic that Corona will not result in a banking crisis

The yardstick for the economic extent of the Corona crisis is currently often the financial crisis that has rocked the world since 2007.

 Many economists and also Chancellor Angela Merkel (CDU) have emphasized that the economic effects of the coronavirus will probably be worse than those of the great banking crisis; Analysts and politicians repeatedly draw parallels to this time. However, what most people probably think of first when they hear the word “financial crisis” is ailing banks, greedy managers, a depraved financial system. The crisis back then started in the financial sector and spilled over into the real sector – this time it could be the other way around.

Corona crisis: “The economic stimulus program is indirectly a bank rescue program”

However, bank watchers hope that it will not come to that – and are still optimistic. “At the moment I don’t see a banking crisis approaching us,” says Jan Pieter Krahnen, Director of the Center for Financial Studies in Frankfurt. Stephan Paul, Professor of Finance and Credit Management at the University of Bochum, also says: “The federal government’s economic stimulus program is indirectly also a bank rescue program. There is no acute need to worry about the banks. ”But that could change, says Paul.

On the one hand, the financial institutions – just like other investors – are affected by the turbulence on the stock markets. “The question is, what do individual banks have in their portfolio of securities? That could be critical, ”says Paul. The biggest problem for the institutions in the medium term, however, is likely to be their loan portfolios. Because if many companies get into payment difficulties as a result of the crisis, they can no longer service their loans or can no longer serve them in full. The banks then have to write them off.

Commercial banks with corporate customers could be hit by the corona crisis

In contrast to the financial crisis from 2007 onwards, this would not mainly affect investment banks – but commercial banks with many corporate customers, including savings banks and cooperative banks. At the same time, investment banking is also affected by the current crisis: Because IPOs accompanied by the financial houses will hardly take place anymore due to Corona, neither will takeovers that they have initiated and financed.

The banks are indeed entering the current crisis with significantly more equity capital of better quality than they were in 2007. However, Sascha Steffen, professor at the Frankfurt School of Finance and Management, warns that the important core capital ratios of banks could fall significantly – depending on how many companies draw their lines of credit during the crisis. Larger companies in particular have their banks grant lines for a fee so that they can get money quickly in an emergency. Banks must hold equity capital for loans issued.

In the US, for example, companies have drawn credit lines of at least $ 124 billion from their banks since March 1, says Stiffen. Also, companies with poorer ratings – i.e. poorer creditworthiness – call up their credit lines in times of crisis. However, these in turn also have a higher risk of default and thus also harbor a higher risk of write-offs for the banks. The more companies call up their lines, the fewer leeway banks have for granting loans to new customers or customers without credit lines that have already been granted, which is likely to include many small companies.

Strict controls

According to a media report, the financial supervisory authority tightened the monitoring of banks’ liquidity during the Corona crisis. The largest systemically important institutions in the eurozone have to give the ECB banking supervisory authority their liquidity indicators and their internal plans for managing liquid funds every day in telephone conferences, as the “Handelsblatt” reported. Slightly smaller banks have to give an account once or twice a week. Compared to the 2008 financial crisis, banks now have thicker liquidity buffers, the newspaper said. So far, there have been no bottlenecks at any major European bank. AFP.

Corona crisis: Legislators and central banks are trying to help companies and banks

At the moment lawmakers and central banks around the world are trying to help their companies and thus also the banks. In Germany, for example, companies can obtain loans from their house bank, for which the state development bank KFW assumes 80 to 90 percent of the risk – so the banks are only on board with small, but all in all, not negligible sums. Companies in Germany also receive direct state aid. The European Central Bank (ECB) also relieves companies with access to the capital market by buying up their bonds. It tries to help small and medium-sized companies without access to the capital market indirectly by relieving the financing banks so that they can give their corporate customers more credit.

The ECB also asked the largest European banks it supervises on Friday not to pay dividends for 2019 and 2020 for the time being and not to launch any share buyback programs. The German financial regulator Bafin had previously made this appeal to the German financial institutions. The European financial supervisors had already granted the banks capital relief in recent weeks – and further measures in favor of bank balance sheets, such as the assessment of critical loans, are expected.

Corona crisis: If things get serious, the ECU should help

And what if all of this is not enough? What if the countries in southern Europe in particular do not have the financial strength to support their economies – including their banks? “If anything gets dangerous, then the ECB is ready to go. She would be there immediately with further measures, ”says Krahnen from the Center for Financial Studies.

Stiffen from the Frankfurt School of Finance and Management sees the European Stability Mechanism (EMS) as the final pillar. This has currently earmarked 60 billion euros to capitalize banks directly if necessary. Stiffen calls for this sum to be increased to at least 200 billion euros – and if necessary, forced capitalization of the largest European banks, including the healthy ones, to prevent individual institutions from being stigmatized. The model for this would be the USA during the financial crisis.

Corona crisis: EMS could make money available to states

However, the reform of the ESM – which has not yet been adopted but is planned – no longer provides for direct capitalization of banks by the ESM. It would still be legally possible, but rather improbable. The ESM could, however, continue to make money available to individual states, which could then capitalize their banks with it.

In the medium term, the corona crisis could also reveal a very different major issue for the banks. The institutes have been closing branches for years as fewer and fewer customers come by. This trend is likely to accelerate due to the current situation: “The banks – and the customers – are now seeing how much you can do online,” says Paul from the University of Chum. After all, many bank branches are currently closed due to Corona. The death of branches could be accelerated by the crisis. This is bad news for people in this division.

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