After the bank bailout: the fear of the credit crunch

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Status: 22.03.2023 2:13 p.m

No sooner have the financial markets calmed down than new concerns arise: Banks could hold back on lending. The ECB banking supervisor also warns of an increasing risk of default.

By Bianca von der Au, tagesschau.de

There is still a lot of turmoil in the financial system. This is how various market observers see it – such as the analysts at DZ-Bank, the central institute of the cooperative banks. You can see an indication of this in the latest ZEW economic barometer. By February, the economic expectations among financial market professionals had risen five times in a row. The stress in the banking system is now causing a significant damper, write the DZ Bank analysts.

It goes on to say: “There are still no effects on German banks or financial institutions in the euro area. However, the current situation shows that, in addition to the still high inflation and higher interest rates, sustained uncertainty in the banking sector would be a spanner in the works.”

“Banks are becoming more cautious in such a situation”

So if banks were to become more reluctant to lend, it could ultimately harm the economy, warns corporate finance professor Michael Grote from the Frankfurt School in an interview with the Deutschlandfunk: “Banks become more cautious in such a situation, they have to become more careful.”

Thomas Gitzel, chief economist at Liechtenstein-based private VP Bank, also believes that concerns about an impact on the economy are not unjustified. The focus is less on the fear of further bank difficulties and more on the question of whether the banks on both sides of the Atlantic will not become even more restrictive. “The fear of a credit crunch is going around,” said Gitzel, referring to a possible credit crunch – i.e. insufficient bank lending to companies and private households.

Banks see the demand for credit falling

When asked by the banks, this is currently not an issue tagesschau.de at different institutes. Nevertheless, the Federal Association of German Volksbanken and Raiffeisenbanken, which as the German banking industry answers on behalf of all banking associations, explains: “The lending standards for corporate customer loans have tightened since autumn 2022. The banks cite the difficult economic situation and industry developments among customers as the main reasons.”

It goes on to say: “Lending standards for loans to private households have also tightened. At the same time, however, the demand for credit from private households has fallen significantly.” This is probably also due to the increased refinancing costs as a result of the turnaround in interest rates, according to the German banking industry when asked by tagesschau.de.

Commerzbank had already said at its balance sheet press conference in February that it was expecting a slight decline in credit volume this year. This has something to do with the slowdown in the construction financing business as a result of rising interest rates. Overall, however, Commerzbank expects that it will benefit from the higher interest rates and that its net interest income will increase this year.

Bundesbank President Nagel is currently not afraid of a credit crunch

Bundesbank President Joachim Nagel does not currently fear a credit crunch either. It was “too early” to come to that conclusion, Nagel said in an interview with the Financial Times. The head of the German central bank did not rule out the possibility that European banks would now become more cautious in lending after the turbulence surrounding the ailing Credit Suisse and the bankruptcy of the Silicon Valley Bank.

From the point of view of finance professor Grote, however, the question is whether the economy is not cooling down anyway. “If we look at the construction sector, then we see that.” It is difficult to say whether this is a demand problem from the economy or a supply problem on the part of the banks.

The fact is: since 2019 – i.e. before the start of the corona pandemic until last year – the number of corporate loans in Germany has grown by 19 percent and private loans by 16 percent. It is true that the Germans are very good debtors. The proportion of loans that are at risk of default or “bad” loans has recently even fallen slightly, to less than one percent – all of this is evident from the latest figures from the Bundesbank.

ECB banking supervision calls on financial institutions to be vigilant

ECB Banking Supervision calls on banks in the euro area to be vigilant in view of an uncertain economic situation. In the ECB’s annual report on supervisory activities, presented yesterday, chief bank supervisor Andrea Enria warns that if the energy crisis is not resolved, credit risk on loans to companies with heavily energy-dependent businesses could increase. In addition, the economic slowdown at the end of 2022 was accompanied by a renewed increase in corporate defaults. Therefore, increased vigilance is required with regard to a deterioration in credit quality.

According to the banking supervisory authorities, the interest rate turnaround initiated by the ECB in July 2022 is positive for the industry overall after years of ultra-loose monetary policy. If the economy develops as currently expected, further orderly rate hikes are likely to be favorable for earnings, the chief bank supervisor said.

Sensitive banks are hit first

“However, if we deviate from the baseline scenario and take into account less favorable developments, things may turn out differently,” said Enria. Borrowers could then struggle to repay their debt on portfolios traditionally very sensitive to borrowing costs. The focus of banking supervision is in particular consumer loans, real estate loans and loans to highly indebted companies, so-called leveraged finance.

In view of the tightening of monetary policy, banks would also have to keep a closer eye on liquidity and financing risks, Enria explained. It is necessary to adapt risk management and strategic control. Some debt management strategies may be challenged by a more challenging funding environment.

“There is a risk that banks could be caught off guard,” warned the ECB’s chief banking supervisor. The case of Silicon Valley Bank and Credit Suisse showed where this can lead. Finance professor Michael Grote explains it in Deutschlandfunk So: “This stress in the financial system first manifests itself in particularly sensitive banks.”



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