According to Bundesbank Executive Board member Joachim Wuermeling, it is still too early to breathe a sigh of relief concerning the banking sector. “Economic activity is recovering, but the economic crisis only has a delayed effect on banks,” he said at the 12th European SSM Round Table in Berlin. Up to now, bank balance sheets had tended to be affected only in isolated cases by the coronavirus crisis. However, insolvencies can trigger credit defaults at short notice and thus require banks to write down loans. This is likely to occur once moratoria, government assistance and the suspension of the obligation to file for insolvency all expire. On the whole, however, credit institutions are well positioned to deal with the effects of the current crisis.

Mr Wuermeling said that the pandemic was continuing to seriously affect economic activity in Europe, adding that, although economic activity had recovered since the low point in April, the measures to contain the pandemic and uncertainty going forward were standing in the way of a full recovery. A marked increase in non-performing loans was therefore to be expected. Although this is likely to be manageable for banks, it will continue to put pressure on profitability, Mr Wuermeling said.

Banks benefiting from reforms

Federal Finance Minister Olaf Scholz, who also attended the event, entitled “Covid-19 and its Impact on the Financial Sector”, pointed out that banks were now reaping the benefits of the solid capital base and buffers they had built up largely as a result of the reforms of recent years. Felix Hufeld, President of the Federal Financial Supervisory Authority (BaFin), confirmed that, according to analyses by the European Central Bank (ECB) and German banking supervisors, the banking sector was capable overall of withstanding the pandemic-induced stress. However, he continued, if the situation were to intensify, banks’ capital adequacy could still deteriorate significantly.

Fresh momentum for the capital markets union

Finance Minister Scholz, who currently also chairs the Council of EU Finance Ministers (Ecofin) as part of the German EU Council Presidency, furthermore expressed his support for further steps toward a capital markets union. According to Mr Scholz, open markets combined with a supervisory authority that is effective across Europe are hugely important. Mr Wuermeling assured his support, emphasising his hope “that the recent proposals by the European Commission will create the momentum needed to make real progress.” He stressed that the economic impact of the coronavirus pandemic had made it all the more important to pursue the objective of a European capital markets and banking union.