Toward the end of the reporting period, the Financial Stability Committee focused mainly on the impact of the Covid-19 pandemic. The pandemic fundamentally changed the economic situation during the first quarter of 2020, partly because of the considerable cost to the real economy and actions that became necessary as a result. However, the extent of the pandemic’s impact on the real economy could not be predicted at the end of the reporting period, which ran from April 2019 to March 2020.
Global financial markets experienced massive losses in value and exceptionally high volatility following the outbreak of the pandemic. In the corporate sector, there is the risk of significant liquidity and solvency problems. High levels of uncertainty about the solvency of entire business sectors could result in the financial system not providing sufficient financial resources to the real economy. Potentially extensive solvency problems in the corporate sector pose a threat to the stability of the financial system. However, as discussed in the Financial Stability Committee’s previous report, bank resilience at the onset of the Covid-19 pandemic was significantly higher than at the onset of the global financial crisis.
Comprehensive fiscal measures have been taken to support the real economy and to mitigate negative economic effects. These actions are intended to secure liquidity and limit losses in income. Numerous regulatory and supervisory measures have been taken in Germany and at the European level to reduce the risk of the banking sector acting in a pro-cyclical manner. BaFin lowered the domestic countercyclical capital buffer and is not expected to raise it again until the end of 2020. The Financial Stability Committee welcomed this decision in light of the pandemic’s economic and financial impact. These extensive actions also counteract increasing financial stability risks.
The shock triggered by the pandemic hit a financial system in which cyclical systemic risks had been building over the past few years. In light of the risk situation, the Financial Stability Committee recommended to BaFin that the countercyclical capital buffer mentioned above be activated for the first time in May 2019. However, given the low interest rates and a weak economy, cyclical systemic risks in Germany continued to build through the end of 2019. In addition to cyclical factors, structural factors have also contributed to the low interest rate environment in recent years. The Financial Stability Committee therefore discussed the implications of prolonged low interest rates for financial stability. In a low interest environment, incentives to search more intensively for better yields increase throughout the financial system. The Financial Stability Committee also discussed options for macroprudential policy action in view of prolonged low interest rates.
The Financial Stability Committee had previously undertaken a detailed examination of the banking sector, the real estate market and life insurers in Germany. The Financial Stability Committee also noted that financial market players are potentially becoming more vulnerable to cyber risks in light of advancing digitalisation. Finally, the Financial Stability Committee looked at stablecoins and their potential to be used as global currencies. The question of whether digital central bank money should be created could not be answered conclusively.