Germany’s Bundesbank warned that a remarkably low number of business failures during the Covid-19 pandemic shouldn’t be seen as a guide for future risks.
Thanks to government support that propped up companies and households during the recession last year, the financial system has emerged from the crisis largely unscathed and banks didn’t face a serious test, it said in its Financial Stability Review.
That, however, doesn’t mean the link between the broader economy and credit risk is broken forever, it said.
In future recessions, “credit risk could increase more strongly,” the Bundesbank said. “The experiences of the past few years should therefore not be projected into the future.”
Germany relied heavily on loan guarantees and a job retention program to support the economy during lockdowns to contain the spread of the coronavirus. After a strong recovery over the summer months, the economy is now facing headwinds triggered by persistent supply bottlenecks and a fresh spike in infections that’s leading to new restrictions on public life.
The central bank also warned that rising interest rates could cause losses to the financial system. For banks, the burden of higher financing costs could outstrip the benefit of improved interest income in the short term.
The wider system also took on greater risk in a search for yield during the long period of low interest rates, it said.
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