“Entire sectors have taken an enormous hit from the crisis” Interview in the Frankfurter Allgemeine Zeitung

Interview conducted by Inken Schönauer.

Ms Buch, you are responsible for financial stability on the Bundesbank Executive Board. How are you keeping the markets stable?

“Financial stability” is often associated with the ups and downs, the short-term fluctuations, in the markets. But that’s not our main concern. Financial stability means functioning financial markets – liquidity is supplied, investment is financed, savers find suitable investment opportunities, the payment system functions. Especially in times of stress such as these, the financial markets should be sufficiently robust to support the economy and not amplify crises.

So how is financial stability looking in these times of coronavirus?

In March, when the pandemic hit Europe and Germany, market stress was very high. There were certainly risks to the stability of the financial system. Many businesses saw their revenue evaporate overnight. This meant that there was no liquidity to pay salaries and cover other costs. Lenders were unable to plug this gap: they were cautious, because it was virtually impossible to gauge how long the revenue losses would ultimately persist and when a recovery would begin.

What happened?

Governments and central banks put together very extensive assistance packages to support the economy and the financial system. These measures have propped up businesses and stabilised financial markets. Supervisors have used the available regulatory leeway to facilitate bank lending. 

So everything's fine then.

We’re keeping a close eye on developments. It's certainly too soon to sound the all-clear

What is the situation now?

The package of policy measures has helped to reduce uncertainty and provide liquidity to enterprises, for example via the state-owned promotional bank KfW. Banks have continued to supply the economy with credit in recent months. This has also been helped by the improved capital levels at banks since the financial crisis. So far, then, we have managed to avoid a credit crunch. 

Yet there are enterprises that are in financial distress and urgently need a loan. 

That is true, and we are monitoring this very closely. There is considerable uncertainty; entire sectors have taken an enormous hit from the crisis. Banks and markets are taking these risks into account in their financing decisions. 

In terms of the uncertainties, is the situation more fragile or less fragile now than at the start of the pandemic? I am referring to a second wave.

There is no precise measure of fragility. We look very closely at the vulnerabilities in the financial system and how robust it is to unexpected developments. Since the financial crisis, regulation has been comprehensively reformed to place banks on a more stable footing. Ultimately, more capital means that banks can lend more and are better able to take on risks. These reforms are now paying off. This time around, the financial sector was far more able to perform its tasks. The problem is the high degree of uncertainty. 

What is the biggest problem?

No one can reliably predict how the economy will develop. Only time will tell whether value chains need to be reorganised and how strong an adjustment there is in demand for some products and services. People could become more cautious and save more, but also change the structure of their consumption. We do not yet know how permanent the effects on businesses will be and whether they will survive the crisis. If a second wave were to hit, the scope for policy response would certainly be smaller than at the start of the pandemic.

How are you preparing for disruptions? What tools does the Bundesbank have at its disposal to combat uncertainty?

We are looking in detail at the impact of the fiscal policy rescue packages and whether the measures are accurately targeted, for example. This involves close dialogue at the European level. 

When do you expect reliable results?

We will have a clearer picture in the autumn. 

You mentioned the role of banks. This time around, they want to be part of the solution rather than part of the problem. Are they?

Of course, banks play a key role when it comes to lending. But loans only help to a limited extent if enterprises are facing solvency problems. In those cases, businesses need additional capital. 

Are the banks stable?

At the moment, German banks are sufficiently capitalised, largely thanks to the reforms of the past decade. The extensive crisis packages mean that the problems faced by enterprises have barely reached the banking sector so far. However, we should increasingly expect them to do so in the second half of the year. Credit defaults will then start to weigh more heavily on banks’ balance sheets and capital. The impact on lending will depend on the buffers accumulated and used by the banks. 
The “too-big-to-fail” report, which takes a closer look at the banks and which also involved your input, has just been published.

What is the outcome? 

The report published by the Financial Stability Board (FSB) evaluates the reforms for systemically important banks implemented around the world after the financial crisis. Overall, the reforms have had a positive impact. Banks are better capitalised, but lending has not suffered. Banks’ financing costs now provide a more accurate reflection of risk, which strengthens market discipline. And if banks still run into difficulties, we have now a much wider range of options to deal with banks in distress. There are new regimes for restructuring and – where necessary –resolving banks. Supervisors have more instruments at their disposal; there is more capital to cover losses. All of this reduces the risk of financial crises and shields taxpayers from losses. 

Do we need more regulation? 

No. We are not suggesting that new regulation should be introduced or existing regulation rolled back. But the report clearly shows that there are still gaps that need to be addressed to improve the existing system. For example, bank resolution and recovery could be made easier. And information – say, about the identity of banks’ creditors who may have to shoulder potential losses – could be provided more efficiently and more transparently.

Europe always looks very enviously at American banks, which seem to be so much better off and are supposedly less strictly regulated. 

We hear this argument a lot, but I’m not sure what it is based on. These banks are subject to the same international supervisory standards. But of course, we are dealing with different financial systems that cannot be compared on a one-to-one basis. We should therefore focus on our own tasks. Sound, well-capitalised banks are a plus – in any region. 
One of the problems of the financial crisis was that banks had become too big. Have banks become leaner?
In some areas, systemically important banks have reduced their market shares. Overall, however, this has not had a negative impact on lending, as other providers have increased their market shares. At the same time, systemically important banks are still very complex and active in many markets. 

Is that a problem?

Not necessarily, but it shows that it is not just about “size”. Banks can also be “systemically important” for other reasons, and we need to take this into account when assessing capital requirements.

What happens if this whole crisis lasts longer than currently anticipated?

Structural change in the economy would then likely accelerate. This will require action to be taken across many political and societal areas. Central banks can only make a very limited contribution here. 

Is the comparison with the financial crisis tenable?

Such a comparison can, above all, show where the differences lie: the financial crisis emanated from the financial sector. The pandemic and the measures to contain it are, in the first instance, hitting the real economy very hard. It’s a global crisis surrounded by a great deal of uncertainty. During the financial crisis, it was the emerging market economies, in particular, that protected us from an even deeper global economic crisis. This time it’s different. This pandemic is affecting everyone. 

Everyone is looking to the ECB; does the Bundesbank still even have enough influence?

Especially in such a global crisis, it is important that we cooperate very closely with others – nationally in the Financial Stability Committee, in Europe and internationally. The Bundesbank is a central part of the Eurosystem; a large part of my work is internationally oriented. We have much better opportunities for coordination than we used to, and that is paying off right now.

Then it really would now be time for a banking and capital markets union. What is taking so long?

Yes, the banking and capital markets union is more important than ever. For example, we need good solutions to deal with mounting non-performing loans and increasing solvency problems in the corporate sector. And with the topics of sustainability and climate change, we are facing major challenges for the banking and capital markets.

Can coronavirus act as a catalyst on the issue?

I’m confident that it can. The response to coronavirus shows that behavioural changes are possible and there is broad acceptance of these changes in society. However, it won’t happen all by itself, which is why politicians have to set the right incentives here too. 

© Frankfurter Allgemeine Zeitung GmbH, Frankfurt. All rights reserved.