As Germany reels from coronavirus, some officials debate
impact on banks
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[April 06, 2020] By
John O'Donnell and Tom Sims
FRANKFURT (Reuters) - As Germany rolls out
a 750 billion-euro economic stimulus package, officials and experts are
discussing whether German lenders, including Deutsche Bank AG and
Commerzbank AG, will be able to weather the economic fallout of
coronavirus without state help.
Interviews with more than a dozen people, including government officials
and senior bankers, show some officials fear that if the crisis
persists, weakened lenders would choke off credit to the economy and
worsen the situation.
For now though, several sources said Chancellor Angela Merkel's
government is focusing on propping up non-financial companies under the
stimulus package and no action is expected on banks in the near term.
Their hope is that the support to non-financial companies through the
aid package will prevent the loans from going bad, avoiding a hit to the
banking sector, the sources said.
Deutsche Bank said it is financially strong, and its discussions with
the government were focused on how the banking industry could support
the real economy. Commerzbank pointed to its low proportion of
non-performing loans of 0.9% to underscore its strength.
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In a statement to Reuters, the finance ministry said: "All Corona-based
programmes of the German government are explicitly focusing on the
non-banking sectors. There are no plans to extend such programmes to
other sectors."
The government believes the aid package has bought Germany three months
of breathing space, three of the sources said. Nevertheless, a debate
has begun over what could be done to reinforce the banks should the need
arise.
Officials have discussed various options in recent weeks to reinforce
the banking sector, should it become necessary, several sources said.
These include a state agency taking stakes in banks to inject capital,
said four of the sources. State guarantees could be given to vouch for
the creditworthiness of listed banks as well as state-backed commercial
lenders, bolstering their standing, one person said.
A spokesman for the finance ministry denied these options were currently
under consideration. "None of this is happening," he said.
RISK BUILD-UP
Lars Feld, the chairman of the German government's council of economic
experts, played down current risks to lenders such as Deutsche. "If you
can avoid insolvencies of companies, the banks are safe,” he told
Reuters in an interview.
"But if additional support is required for the banking sector, the
government will do it. All of this assumes, however,
that the current measures have failed," Feld said.
The council, which advises the chancellery, finance ministry and economy
ministry on policy, warned the government in an 101-page report in late
March that an economic slump could spill over to banks. "If tackling the
coronavirus takes longer, the number of insolvencies will rise, which
could, in turn, put banks in distress," the council wrote.
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![](../images/040620pics/busine53.jpg)
German Chancellor Angela Merkel gives a media statement on the
spread of the new coronavirus disease (COVID-19) at the Chancellery
in Berlin, Germany, March 22, 2020. Michel Kappeler/Pool via
REUTERS/File Photo
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Jan Pieter Krahnen, a finance expert at Goethe University and advisor to the
finance ministry, said it was "very likely" that banks would need state aid as
their corporate customers run down credit lines and fail to pay back loans.
"It is very apparent that there is a risk build-up," Krahnen said. "In the end,
the accumulation of the problems will happen in the financial sector."
Some officials have considered the idea of a forced recapitalization, which is
reminiscent of the U.S. government's Troubled Asset Relief Program during the
financial crisis of 2008, four of the sources said.
Under TARP, the American government injected nearly $250 billion into the
country’s banks in return for preferred shares and warrants. Many analysts
believe the move helped stabilize the financial system.
"It avoided the stigmatization of individual banks," said Florian Toncar, a
member of the German parliament's influential financial committee, declining to
discuss any specifics.
IN GOOD SHAPE
Other experts played down the concerns about the financial fallout from the
coronavirus.
Volker Wieland, another member of the council of economic experts, said some
steps had already been taken to help banks, including regulatory relief on
banking rules and the government’s support to companies.
"For now the banks are not the hardest hit,” Wieland said. “I don't think we
should now say the next step would be to have the same programme for the banks."
Much is at stake for Germany. It needs a strong banking sector to support the
economy, and its two largest banks have struggled in recent years. The shares of
Deutsche Bank and Commerzbank have roughly halved in recent weeks. For a
graphic, click https://reut.rs/3bIbYrk and https://reut.rs/2R2Fjoq
In an interview, Commerzbank board member Roland Boekhout said, "The corona
crisis is not a financial crisis. The banks are in good shape."
A Deutsche Bank spokesman said the bank was not aware of “any consideration
being given to assistance to domestic banks."
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"Our liquidity and capital strength enable us to play a crucial role in helping
clients navigate through this environment," the spokesman added.
Indeed, the bank’s tier 1 common equity ratio, a measure of capital strength, is
13.6%, comfortably above the regulatory requirements.
One senior person at Deutsche Bank said the bank was not discussing state aid.
But the person added that the question could arise if the economy deteriorated.
(Additional reporting to Patricia Uhlig in FRANKFURT and Matt Scuffham in New
York; Editing by Rachel Armstrong, Paritosh Bansal and Edward Tobin)
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