Bundesbank’s VP Buch: Must Prepare for Rising Corporate Insolvencies

29 November 2020

By David Barwick – FRANKFURT (EconoStream) – German Bundesbank Vice President Claudia Buch on Sunday warned of a pending increase in corporate insolvencies for which banks and relevant authorities need to be prepared.

In an interview with German weekly Frankfurter Allgemeinen Sonntagszeitung, a text of which was made available by the Bundesbank, Buch said that the low number of write-offs so far would soon climb.

Asked how much more lockdown the economy and the financial system could weather, Buch said the Bundesbank’s central scenario incorporated negative developments to a degree and that ‘the financial system would certainly be able to cope with that.’

‘The banks have sufficient buffers’, she said. ‘But banks and public authorities should also prepare for more negative developments and for dealing with higher insolvencies.’

Expansive monetary and fiscal policies have to date shielded the financial sector from the initial shock to hit the real economy, she said, as a result of which banks have been compelled to write off or adjust the value of only a ‘very low’ number of loans.

‘This should change in the near future’, she said. Since insolvencies do not enter the statistics until the related legal proceedings have reached a conclusion, ‘the figures still look good at first glance - but only because many proceedings are postponed’, she said. This won’t remain the case, she added.

The Bundesbank expects a relatively ‘strong increase’ in manufacturing sector insolvencies, she said, but an even stronger one in the services sector. To be sure, she reminded, this partly reflects a historically low starting point.

‘In any case, increasing insolvencies, but also business deregistrations, will lead to value adjustments at banks’, she said.