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Implications of COVID-19 on the structure of the EU banking market – the mid-term perspective


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Ladies and Gentlemen,

Thank you very much for your invitation to the 12th European SSM Round Table. I am very pleased that parts of today’s event dealing with the impact of COVID-19 on the European financial sector can actually take place here in Berlin – despite the dynamic development of the pandemic. Our methods of communication have undergone a fundamental change. Hybrid meetings like this one today have almost become our new reality during the corona crisis – and this development has been faster than we could have suspected just a few months ago. I expect that at least some of these new forms of digital communication will prove to be sustainable alternatives even after the end of the COVID-19 pandemic – in the sense of “enduring”, but also in the sense of “environmentally friendly”, because every digital participant who refrains from taking a flight helps to reduce greenhouse gas emissions.

We cannot yet predict with absolute certainty how COVID-19 is going to impact the European financial markets in other respects. Is the COVID-19-pandemic like the global financial crisis reloaded? I believe the corona crisis is different in many respects. While the financial crisis began with upheavals on the US real estate and financial markets and the global impact on the financial and real economy only came with some delay, COVID-19 completely and instantly brought large parts of the real economy to a standstill – affecting both supply and demand at the same time. Though the crises differ, both have at least one thing in common: the first critical developments can be seen in liquidity.

To keep the effects on the financial and real economy at an absolute minimum, numerous measures were immediately put in motion at the onset of the crisis – and these efforts were quick and well-coordinated. Three actors were involved on the public side: governments and parliaments put together aid packages of unprecedented dimensions, the European Central Bank ensured liquidity on the market by taking a wide range of monetary decisions, and – within a short period – we supervisors implemented a series of measures to strengthen the banks’ lending capacity.

If banks were a trigger to the problem in the past financial crisis, today they have a major role in tackling the effects of the pandemic: they promptly allocate the public funds made available to those who need them. And they do so by fulfilling their traditional role – that of intermediary between lenders and borrowers.

Of course, we are also benefitting from the regulatory reforms that followed the financial crisis of 2007-2008. Without these far-reaching reforms, the banking sector today would not be as resilient overall. Unlike in the past, banks today have more and better capital. In addition, we have more liquidity in the financial system. Nevertheless, the banking sector today is still not bulletproof. Let’s be honest: without the measures being taken by our politicians, central banks and supervisors, banks would now undoubtedly be having a much harder time in the corona crisis. And this trio has probably so far prevented a major economic disaster and severe turbulence in the banking system.

We at BaFin – along with other supervisory authorities – have made use of the flexibility within the existing regulatory frameworks and have taken a large number of temporary measures. We have come a long way towards accommodating the banks, but only as far as the laws, accounting standards and financial stability requirements allow to do so. We exercise flexibility particularly wherever we see obstacles that would otherwise stand in the way of the banks’ efforts to help the real economy through these difficult times, without however compromising basic standards on solvency- and risk management requirements. We also provide the banks with administrative relief. To this end, we have already suspended all on-site inspections, and we are keeping requests for information to a minimum. We have also postponed scheduled stress tests. All in all, this approach has so far proven itself.

Right at the onset of the crisis, we also reduced the countercyclical capital buffer to zero per cent – effective at least until the end of 2020. We have thus given the banks the leeway they need to be able to shoulder the burdens brought on by the crisis. For instance, we are allowing banks to dig into capital buffers – buffers they built up in less difficult times. In more difficult times – which is what we are currently experiencing – they can use these buffers, for example to grant loans. This is immensely helpful. And the idea behind it is as simple as it is compelling: in crisis situations, banks granting loans should not hit the brakes unnecessarily because of regulatory requirements causing excessive procyclical effects. That would exacerbate a downturn in the real economy, such as we are currently experiencing. But – overall – Germany’s banking market still has more than 100 billion euros in surplus capital.

Even so, this doesn’t mean we can relax yet. The corona crisis will have consequences. In other words: there are apparently more challenges heading towards the banks. Institutions will have to expect the number of insolvencies, and thus credit defaults, to increase – probably in several waves. Our COVID-19 stress test, which we developed together with Deutsche Bundesbank, has indeed shown that German banks would be sufficiently capitalised even in a very drastic scenario – for example if GDP drops by 10.8 per cent and the average Common Equity Tier 1 capital ratio falls by 4.7 percentage points to 11.2 per cent. This scenario doesn’t even take into account countermeasures that the institutions could take themselves. Nor does it consider the effects of the various government aid programmes. On the whole, European banks too are in good shape – at least according to the results of the COVID-19 Vulnerability Analysis conducted by the SSM.

However, these analyses have two things in common: firstly, they are merely “if-then” assumptions – and should always be used with caution. Nobody can accurately predict just how high the number of coronavirus-related defaults will be in the end. Secondly, the relative robustness indicated by the above-mentioned stress test is only true in the aggregate. In real life, however, things may look quite different for individual banks. Particularly those which were already weak before the pandemic. For this reason, bank managers also need to stay focused on operational and strategic matters, in addition to taking care of acute crisis management. In other words: they need to make their institutions more efficient.

As supervisors, we would do well to continue closely monitoring the developments in the industry and to urge banks to keep as much capital in the system as possible. Banks should not be tempted to weaken their capital base by making untimely dividend payouts or profit distributions – after all, distributable capital in the German banking sector amounts to almost 1.6 billion euros. But we cannot issue a general ban on distributions for the entire banking sector – there is no legal basis for that. Institutions intent on distributing profits should first ask themselves whether they can give a sustainably positive profit forecast and whether they will still have sufficient capital buffers if the stress phase continues and notify BaFin accordingly. At any rate, BaFin will be asking these two questions in each individual case. If the answer is “no” – in other words, if an institution makes distributions without ensuring good capital resources and enough liquidity – we can and we will issue buying restrictions on an individual level.

And, of course, we are not alone in our expectations: the ECB, the EBA and the ESRB have also publicly announced comparable expectations. The ECB and the Financial Stability Board recently extended their recommendations for the significant institutions under the ECB’s direct supervision; these will now apply beyond October 2020 until January 2021.

Ladies and Gentlemen,

This much is certain: as soon as the crisis has passed its peak, we will gradually begin to resume our normal supervisory activities. We’ll do so because we want a banking system that is resilient over the long term. In response to those who view the temporary supervisory relief measures as an opportunity to demand the large-scale easing of regulatory requirements, I can only say that there will not and cannot be a relapse into deregulation and thus into the pork cycle of crisis, regulation, deregulation and renewed crisis. That truly wouldn’t benefit anyone – neither the financial industry nor its customers nor the public good we call financial stability.

Thank you very much. I am looking forward to a lively discussion with you.

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