Claudia Buch: Financial stability and too-big-to-fail after the Covid-19 pandemic

Opening address by Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, at the TBTF webinar, Adam Smith Business School, University of Glasgow Commercial Law Centre, University of Edinburgh, virtual, 16 December 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I. Overview

More than ten years ago, many countries experienced a deep recession in the wake of the global financial crisis. At that time, banks were rather weakly capitalised, resolution regimes for banks were missing, and taxpayers' money was often used to bail-out banks. Currently, we are facing yet another historic crisis – the Covid-19 pandemic.

This crisis is of a different kind. The shock did not originate in the financial sector, and it has not yet fully impacted the financial system. In the first phase of the crisis, extensive fiscal and monetary policy as well as supervisory measures helped to cushion the initial impact of the shock (Deutsche Bundesbank 2020). The financial system itself is now also more resilient than it was before the global financial crisis. All this helped to avert a liquidity crisis in the real economy. Banks have been key for the transmission of monetary and fiscal policy – and benefit from the implemented measures as the shock has not yet fully hit the banks.

In the current phase of the pandemic, solvency risks are likely to increase, and a high degree of uncertainty about future macroeconomic developments prevails. Adequate preparation, both in the public and the private sector, will be important to deal with the increasing number of insolvencies. Banks need to use their capital buffers to prevent a deleveraging.