20 June 2013

Bundesbank/Dombret: The debt crisis and its consequences for the real economy

Speaking at the Handelsblatt CFO-Kongress, Dombret discussed the connection, interlinkage and natural symbiosis of financial markets and the real economy. He called for a controlled deleveraging process and a carefully structured and implemented banking union.

Translated from the German

"The crisis is without question a challenge for companies in the real economy - even for those who have not suffered from direct effects in terms of demand failures. There is a close connection between the financial and real economy.

To explain the crisis only with "runaway" financial markets is an inadequate analysis: Inherently, bank balance sheets are a reflection of the economic activity. In the discussion of the sovereign debt crisis it should also be remembered that debts are not per se a bad thing. Companies are customarily dependent on external financing to fund investment and to enable growth. Debt starts to be harmful when it reaches an excessive level and capital flows into unprofitable areas. 

After the bursting of price bubbles, therefore, a deleveraging process is necessary - as we see happening in large parts of Europe at the moment. Households and firms are forced to increase their savings in order to meet their debt obligations. This curbs consumption and investment, which negatively affects economic growth. As a consequence of this, banks can also get into trouble: when it comes to credit losses and liquidity constraints, this leads to fewer loans given even to healthy firms.

Debt relief, yes, but not driven by a credit crunch: This short statement encapsules a successful deleveraging process. The central banks can support this balancing act to a limited extent. In the first instance, the banks themselves, however, have the duty to raise the required capital on the market. If this fails, a recapitalisation by the state may become necessary because we need sufficiently capitalised banks to finance the real economy.

But in order to re-establish sustainable growth in the euro area, we also need the second pillar of the banking union, a joint restructuring and resolution regime for banks. The example of what happened in Japan clearly shows the negative impact that so-called "zombie banks" can have on the real economy. A functioning settlement mechanism also positively influences the decision-making process of banks whether to lend or not, which in turn benefits the real economy and promotes growth.

If a bank has to fear that it might face resolution in the framework of an existing resolution mechanism, this reduces the readiness to adopt risks and increases the incentive to monitor loans more carefully. In that way, capital will be put to more long-term use and less risky investments.

Old risks that have been accumulated under the responsibility of national supervisors must be taken on by the Member States, if necessary. Any other arrangement would amount to a transfer union between states, and any such union, if at all, should be set up with the approval of national parliaments and not under the guise of a banking union.

Full speech (in German)

English version

© Deutsche Bundesbank