FRANKFURT (Reuters) – As Germany rolls out € 750 billion economic stimulus package, officials and experts question whether German lenders including Deutsche Bank AG and Commerzbank AG will be able to weather the fallout of the coronavirus without state aid.
Interviews with more than a dozen people, including government officials and senior bankers, show that some officials fear that if the crisis persists, weak lenders will strangle credit to the economy and make the situation worse.
For now, however, several sources have said Chancellor Angela Merkel’s government is focused on supporting non-financial companies as part of the stimulus package and no action is expected on banks in the near term.
Their hope is that supporting non-financial businesses through the aid package will prevent lending from deteriorating, thus avoiding a blow to the banking sector, the sources said.
Deutsche Bank said it was financially sound and its discussions with the government focused on how the banking sector could support the real economy. Commerzbank pointed to its low proportion of non-performing loans of 0.9% to underline its strength.
In a statement to Reuters, the finance ministry said: “All German government programs based on Corona focus explicitly on the non-bank sectors. There are no plans to extend these programs to other sectors.
The government believes the aid package gave Germany three months of breathing space, three of the sources said. Nonetheless, there has been a debate on what could be done to strengthen banks in times of need.
Officials have discussed in recent weeks various options to strengthen the banking sector, should it become necessary, several sources said. These include a state agency taking stakes in banks to inject capital, four of the sources said. State guarantees could be given to secure the creditworthiness of listed banks as well as state-backed commercial lenders, thereby boosting their reputation, one person said.
A spokesperson for the Ministry of Finance denied that these options were currently under consideration. “None of this is happening,” he said.
(GRAPHIC: The Lost Decade of Deutsche Bank -)
(GRAPHIC: Tough times for Commerzbank -)
Lars Feld, chairman of the German government’s council of economic experts, downplayed the current risks for lenders such as Deutsche. “If you can avoid corporate insolvency, banks are safe,” he told Reuters in an interview.
“But if additional support is needed for the banking sector, the government will. All this assumes, however
that current measures have failed, ”said Feld.
The council, which advises the chancellery, the finance ministry and the economy ministry on policy, warned the government in a 101-page report in late March that an economic crisis could spill over to banks. “If the fight against the coronavirus takes longer, the number of bankruptcies will increase, which could, in turn, put banks in distress,” the council wrote.
Jan Pieter Krahnen, financial expert at Goethe University
and an adviser to the Ministry of Finance, said it was “very likely” that banks would need state aid as their corporate clients exhaust their lines of credit and fail to repay their loans.
“It’s very obvious that there is an accumulation of risk,” Krahnen said. “Ultimately, the accumulation of problems will occur in the financial sector.”
Some officials have considered the idea of a forced recapitalization, which is reminiscent of the US government’s Troubled Asset Relief Program during the 2008 financial crisis, four of the sources said.
Under TARP, the US government injected nearly $ 250 billion into the country’s banks in exchange for preferred stock 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 influential finance committee in the German parliament, refusing to discuss any details.
IN GOOD CONDITION
Other experts downplayed concerns about the financial fallout from the coronavirus.
Volker Wieland, another member of the board of economic experts, said some steps had already been taken to help banks, including regulatory easing of banking rules and government support for businesses.
“As of now, banks aren’t the hardest hit,” Wieland said. “I don’t think we should now say that the next step would be to have the same program for the banks.”
The stakes for Germany are considerable. It needs a strong banking sector to support the economy, and its two largest banks have struggled in recent years. Shares of Deutsche Bank and Commerzbank have been cut by around half in recent weeks. For a graph, click on reut.rs/3bIbYrk and reut.rs/2R2Fjoq
In an interview, Roland Boekhout, member of the board of directors of Commerzbank, said: “The corona crisis is not a financial crisis. The banks are in good shape.
A spokesperson for Deutsche Bank said the bank was not aware of any “consideration of assisting domestic banks”.
“Our liquidity and the strength of our capital allow us to play a crucial role in helping clients navigate this environment,” added the spokesperson.
Indeed, the bank’s Tier 1 capital ratio, a measure of capital strength, is 13.6%, well above regulatory requirements.
A Deutsche Bank official said the bank was not discussing state aid. But the person added that the question could arise if the economy deteriorates.
Additional reporting to Patricia Uhlig in FRANKFURT and Matt Scuffham in New York; Editing by Rachel Armstrong, Paritosh Bansal and Edward Tobin