Opening of the digital conference "COVID-19 and its impact on banks in Germany" Interview with Annette Weisbach as part of the online event
Mr Weidmann, the banking symposium is being replaced by a digital conference this year. What are your thoughts on this and how are you experiencing the current crisis personally?
I’d like to start by extending a warm welcome to all of you. I would have preferred to be able to say, “
It’s wonderful to have so many of you here”. Instead, I find myself saying, “
It’s wonderful to have so many of you tune in”. I am delighted that, even in these difficult times, our regular banking symposium can still go ahead – in the form of this digital conference. Thanks to the internet and modern telecommunications, you will have the opportunity to engage with some fascinating presentations and discussions on supervisory topics today and actively participate from wherever you happen to be right now. Like many of you, my personal experience of this crisis is primarily one of working from home, being in front of my computer screen, on telephone and video conference calls. And on occasions – such as today – when I’m on-site at the Bundesbank, then, of course, always keeping the appropriate distance between myself and others.
I think that these electronic formats are actually working pretty well but social interaction, personal contact with others, is lacking at the moment.
What does the pandemic mean for the German economy?
The spread of the coronavirus and the various measures designed to contain it are altering our everyday lives and also impinging hugely on the economy. In mid-March, not only schools but also restaurants, cinemas and many shops had to close. It is thus having a particularly severe impact on consumption-related services sectors – mainstays of economic activity before the crisis. The resulting absence of consumer spending alone is likely to have caused GDP to contract by around 1% in the first quarter already. On top of that, demand from abroad is also lacking, as the pandemic is also affecting important partner countries. Common economic indicators are, in some cases, still painting the same picture as before the introduction of social distancing measures. This is why we are looking to other indicators, such as data on motorway tolls, too. We know from this that recorded truck mileage was some 15% lower at the start of April than at the beginning of March. Electricity consumption has also seen a distinct decrease. On the basis of that, you can well imagine that industry is also having to deal with a marked decline in output. In some cases, key intermediate goods are also lacking, as production outages in other countries can bring disruption to supply chains. Just to give you an idea of the negative repercussions for our economy: the number of new registrations of short-time working arrangements has risen sharply since the beginning of March, with one in every three firms in Germany now having filed as applying short-time work schemes. The percentage of employees actually working shorter hours is likely to be much smaller. But one thing is clear: Germany is in the midst of a severe recession.
You say a severe recession. How bad do you think this recession is going to be? And how quickly will Germany’s economy recover? Do you think a swift recovery is realistic?
Forecasts are always fraught with uncertainty. At present, this uncertainty is probably unparalleled. The crucial thing will be how the epidemic develops, that is to say, whether infection rates remain under control and which protective measures stay in place for how long. Depending on your underlying assumptions, you end up with very divergent projections. As we know, Germany has now started some cautious easing of containment measures. And if the healthcare system can bear up to it, then further easing is likely to follow. But it’s possible that, even then, we will still have to live and work with certain restrictions in place until an effective medical solution has been found. Given this, a swift and strong recovery is fairly unlikely. Besides, several important trading partners are also being affected by the crisis, some even more severely. As an exporting nation, the recovery of our economy also depends on developments abroad.
Is there a danger, then, that the economy might slide into a downward spiral?
Despite all the uncertainty, I do not anticipate a downward spiral. Fiscal policymakers have deployed considerable resources in order to mitigate the economic fallout of the pandemic. The automatic stabilisers are working because we have a well-developed social security system here in Germany. In addition, central and state governments have introduced considerable support measures. The Federal Government has also announced that it will launch economic stimulus packages if necessary. And the Eurosystem is providing the necessary monetary policy support with a raft of measures. I therefore expect the economy to be able to make a sustained recovery once the pandemic has been overcome.
You already mentioned that policymakers have adopted a large number of economic and social policy measures in order to help the economy. Do you consider these measures to be right and appropriate?
Yes. Policymakers have acted swiftly and comprehensively, which is precisely what is needed in a situation such as this. Many enterprises are now facing an, at times, substantial loss of revenue. But temporary liquidity shortages must not be permitted to turn into solvency problems. That is why these enterprises are being given relief from taxes and social security contributions. There are emergency aid packages for the self-employed, credit guarantees and the possibility for the government to take a direct stake in larger enterprises. Employees, too, are comprehensively protected. The expanded short-time working benefits are helping to avoid redundancies and stabilise income. The various programmes are increasingly being utilised, which clearly shows that there is a demand and the aid is reaching those who need it.
But the Federal Government has not yet launched a conventional stimulus programme.
I think that is the right move. Because, for the time being, it’s about combatting the acute crisis. Under the current contact restrictions, a conventional economic stimulus programme would run the risk of being largely swallowed up anyway. But such a programme could be useful at a later stage if recovery does not get off the ground. Fiscal policy would also have the necessary room for manoeuvre for this.
And accommodative monetary policy should not be forgotten either.
That’s true. Compared with financial policy and other policy areas, monetary policy can only play second fiddle when it comes to mitigating the impact of the crisis, but it still makes an important contribution within the framework of its mandate. There may be different views on specific measures. To me, it’s important that the ECB Governing Council has acted decisively and jointly. However, one thing must be clear, and that applies to monetary policy and fiscal policy alike: although the exceptional support measures are needed at present, we must not lose sight of the exit from these measures and long-term sustainability. The government will ultimately have to scale back its currently very strong influence on economic activity.
Mr Weidmann, in this digital conference, the Bundesbank, in its role as banking supervisor, engages in dialogue with the supervised institutions. What is your message, as Bundesbank President, to banks in the coronavirus crisis?
Quite in contrast to the financial crisis, the banks and financial markets are not the source of the crisis this time round. Also, comprehensive lessons were learned from the crisis back then. In particular, banks have been ordered to hold more capital. In Germany, banks’ tier 1 capital ratio has roughly doubled since then, from just over 8% in 2006 to 16½% at the end of 2019. The institutions are benefiting from this now. They are in a much better position and are able to cope better with potential losses. The supervisory and regulatory authorities have also responded with numerous relief and easing measures, in the expectation that this will enable banks to better fulfil their core function of supplying credit to the economy and households. But it was also unmistakably recommended to stop dividend payments and share buy-backs until October 2020, since the capacity to absorb losses should not be unnecessarily weakened at this time. Banks play a key role in our economy – especially now during the crisis. They not only pass on public funds but, by granting loans, also help to mitigate the economic fallout for enterprises and households. To this extent, banks can be an important part of crisis resolution.
Last question, Mr Weidmann: will we see you in person at the next symposium in a year’s time or is a digital conference the model of the future?
Digital transformation is currently receiving a significant boost. I can imagine that we will use the new digital possibilities much more frequently after the crisis than before, above all for virtual events. We will – hopefully – see today how well that works. At conferences, however, it isn’t just about the formal exchange of information. We should not underestimate the personal exchanges that take place on the sidelines of events and during coffee breaks. Virtual conferences and symposiums cannot fully replace real encounters between people. With that in mind, I hope that the event can take place in its usual format next year. And for today, I hope that you will also have fruitful discussions on the virtual podiums.
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