(Bloomberg) – The German financial system must prepare for growing strains resulting from corporate bankruptcy and growing debt, by ensuring that credit continues to flow, according to the Bundesbank.
“The effects of the real economic crisis have not yet fully arrived in the German financial system,” the central bank said in its Financial Stability Review published Tuesday. “Corporate solvency problems will become more visible in the financial system as the crisis continues,” with market valuations only partially reflecting economic fundamentals.
The Bundesbank predicts that insolvencies will rise by more than 35% in the first quarter of next year and argued that German banks would likely be able to cope. At the same time, he warned that projections remain highly uncertain given the severity and unprecedented nature of the coronavirus shock.
“Corporate insolvencies will increase, which will also lead to increased provisions and losses with banks, but banks actually have buffers that they can use to cushion those shocks and continue to lend,” Claudia Buch said. , vice-president of the Bundesbank, in an interview with Bloomberg Television. “Banks should use these cushions to make sure – as losses start showing – that we don’t have deleveraging in the banking sector.”
Many companies are struggling to survive after the pandemic forced governments around the world to introduce large-scale lockdowns earlier this year. As infections rise again, German politicians are trying to prevent similar restrictions to protect the economy, even though brakes have been put in place.
The Bundesbank is planning a gradual recovery in production, thanks to substantial monetary and fiscal stimulus measures.
At the same time, he highlighted significantly higher debt levels in the private sector, as well as in the public sector, as a risk.
Lenders could be forced to increase compensation for losses and the European Central Bank could face pressure to maintain loose monetary policy. “This is why a drastic reduction in the sometimes very high debt levels will be vital after the crisis”, said the Bundesbank.
The Dutch central bank warned in its financial stability report on Tuesday that the worst could be yet to come for banks. If the country’s financial system has so far been resilient, governments, regulators and central banks should continue their supportive measures, President Klaas Knot said.
(Add Buch’s comments to fourth paragraph, DNB report to ninth paragraph.)
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