Bank / Credit Union

Germany banks brace for post-pandemic bankruptcies

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October 14, 2020

With Europe's economy struggling due to the pandemic, Germany's central bank is taking steps to warn all banks to brace for a potential wave of insolvencies, according to a Yahoo Finance report.

In its 2020 financial stability report, Germany's central bank, Bundesbank, said the government is strivigng to cushion the blow by including a temporary suspension of bankruptcy-declaration requirements, which would mean fewer insolvencies filed this year compared with 2019. The scenario could change as early as next year.

"Our simulations predict that insolvencies and value adjustments will increase in the future," Bundesbank VP Claudia Buch told Yahoo.

The bank predicts some 6,000 insolvencies will hit in the first quarter of 2021, compared with 4,700 in total in 2020, but noted it "cannot rule out that … a lot more companies will go bankrupt than is currently expected."

Government measures have averted any pushback so far in the corporate sector, but warn of a scenario where bankruptcies and loan defaults could and would increase unexpectedly. Banks may rein in lending to comply with the capital ratios required by the market and regulators, which would slow the economic recovery or exacerbate an economic slump.

In that case, the Bundesbank said that banks should then "use their existing capital buffers to produce adequate loans," according to the Yahoo report.

Buch warned ongoing low interest rates could lead market participants to take higher risks in search of returns, saying that "we have to keep an eye on this build-up of risk."