Joachim Wuermeling ©Nils Thies

Wuermeling: Supervisory reforms since the last crisis worth their weight in gold

According to Bundesbank Executive Board member Joachim Wuermeling, the situation in the banking sector is currently stable. Excess capital and supervisory capital buffers are available to expand lending and, where appropriate, also for risk provisioning. To date, operating business and lending have functioned without any significant restrictions, Mr Wuermeling explained at an online conference attended by over 4,000 participants. Wuermeling also used the conference to thank banks for their efforts, especially in the issuance of KfW loans. 

He said that the joint focus needed to be on maintaining stability in the financial sector. “The current crisis shows that we, as supervisors, have learned the right lessons from the last crisis. Many of the measures, which, in some cases, came under sharp criticism, are now proving to be worth their weight in gold,” Mr Wuermeling said. This allows supervisors to maintain flexibility in the current crisis situation without losing sight of the objective of stability.

The digital conference served as a forum for exchanging ideas with banks, policymakers and supervisors: various speakers from all over Germany were connected via video feed. 

Focus on credit risk

Banking supervisors need to take particular account of credit risks, which are likely to increasingly materialise  from the third quarter. According to Mr Wuermeling, these risks are currently manageable. “We do not know how the need for loan loss provisioning will develop. However, on aggregate, the available capital is sufficient to cover loan loss ratios on a scale such as we saw in 2003 following the dotcom bubble or in 2009,” said Mr Wuermeling. However, he warned against “blind lending” in the COVID-19 era: “Even though lending needs to be fast and efficient at the moment, one thing is clear to us in our role as supervisors: lending must continue to be governed by the principle of prudence.” No “legacy burdens” that might hamstring banks well into the future should be created. 

Weidmann: Banks in better shape

Bundesbank President Jens Weidmann also sees banks as being in better shape than before the 2008 financial crisis. “Lessons were learned from the crisis. In particular, banks were ordered to have more capital,” Mr Weidmann said at the same event. 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. In Mr Weidmann’s opinion, institutions are now benefiting from this and better able to cope with potential losses. Another important difference was that, unlike in the financial crisis just over ten years ago, this time banks and financial markets were not the starting point of the crisis.

Banking sector post-COVID-19

When asked about the most lasting change in the banking sector caused by the coronavirus crisis, the response given by the majority of participants in an online survey was an acceleration in the digitalisation of banking business. Mr Wuermeling stressed that other challenges, such as low interest rates or low profitability, had not diminished either. He was certain that “the structure of the banking sector will change – possibly faster than assumed before the crisis.