News ID: 268005
Published: 1145 GMT April 21, 2020

German banks grapple with Berlin’s bazooka

German banks grapple with Berlin’s bazooka

The biggest challenge in German banking has suddenly gone from job cuts to handing out state-guaranteed loans as quickly as possible.

Compared with the rest of Europe, Germans have had a lot more reason to thank their government since the start of the coronavirus crisis, reported. 

As a proportion of GDP, Berlin’s immediate fiscal stimulus and its program of state-guaranteed loans are more than twice the size of schemes other big European economies have announced, according to Brussels think-tank Bruegel. 

Germany’s health crisis has been less extreme than elsewhere on the continent and its economic hit is also expected to be less severe, particularly compared with southern Europe. 

Judging by the stock market, however, investors don’t seem to think that’s going to put German banks in any better position than their European counterparts. Shares in the two biggest banks, Commerzbank and Deutsche Bank, fell by about 50 percent between mid-February and April, in line with the sector across the region. Even before the coronavirus crisis, German banks were already struggling with profitability more than peers elsewhere in Europe. Over the last decade German banks’ asset quality has generally been better than southern European banks — with the important exception of shipping and now, perhaps, aviation. 

As Berlin deploys its hefty financial muscle to backstop businesses, German banks are again hoping that they can again enjoy lower credit costs than banks further south. 

Especially in comparison with Italy, sector insiders say just the signal of strong sovereign support has been vital to German businesses. 

Berlin announced a much clearer equity backstop than other European states, earmarking €100 billion for capital injections in March, and not just for the biggest corporations. 

Bankers say this could become vital if lockdowns persist, leading to unsustainable levels of leverage, and especially if equity capital markets remain closed.

Crucial role The banks themselves have a crucial role to play in the biggest part of what Finance Minister Olaf Scholz called his ‘fiscal bazooka’ on March 13 — a massively enlarged and loosened version of a decades-old program of bank-channeled business lending from state development bank KfW. 

Scholz has removed the previous €357 billion cap on the program, which unlike other guarantee schemes in Europe also provides banks with liquidity up to the amount of the indemnity. German bankers are enthusiastic. 

Chief executive of UniCredit-owned HVB, Michael Diederich, said “the decisiveness and speed of the government’s reaction were impressive.” Roland Boekhout, Commerzbank’s head of corporate clients, gives the KfW program ‘two thumbs up’.

KfW is relying much more heavily than before on the banks’ assessment of firms’ creditworthiness, even though it is taking much more of the risk — 90 percent or 80 percent for the biggest chunk of the program and 100 percent for smaller loans, compared with 50 percent before the COVID-19 crisis. Now it is only doing its own checks on loans above €3 million and on a fast-tracked basis for loans below €10 million. 

The big German private-sector banks don’t see this as an opportunity to win market share but rather as proof of the value of their client relationships.

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