The onset of the pandemic brought with it considerable financial market losses, and the German economy experienced one of the most severe slumps in decades. Extensive government measures prevented a liquidity crunch in the corporate sector. Businesses were provided with grants, instant loans and loan guarantees, for example, and the rules governing short-time work were made more flexible. Comprehensive measures in the domains of fiscal policy, monetary policy and supervision significantly helped to reduce uncertainty, support the real economy, stabilise lending and shield the financial system from major losses. Although the number of corporate insolvencies is still low, a strong future increase in insolvencies cannot be ruled out. Scenario analyses suggest that the German banking system is likely to be able to cope even with a strong rise in corporate insolvencies and associated losses and write-downs, particularly because the banking system is more resilient than it was prior to the global financial crisis of 2007-2008. It has structurally more capital and additional capital buffers. Supervision has also been improved and banks in distress can be dealt with in a more targeted way. The willingness of banks to use their capital buffers if required can play a key role in preventing lending from being excessively constrained. The German insurance sector has had a stabilising effect on prices in financial markets in the wake of the coronavirus shock. In the investment fund sector, developments in March 2020 briefly revealed structural vulnerabilities. The newly created liquidity management instruments will enable funds to better manage their risks in future.

The vulnerabilities stemming from the granting of residential real estate loans continue to exist in the German financial system. Alongside robust income growth in the household sector, the low interest rates were a key factor behind the continued growth in the residential real estate market during the reporting period. Overall, however, the indicators did not signal any acute risks to financial stability emanating from the residential real estate market. The Financial Stability Data Collection Regulation (Finanzstabilitätsdatenerhebungsverordnung) has now created the legal basis for requesting data on residential real estate loans. In the medium term, the new data will allow for deeper analysis and assessment of the risks to financial stability stemming from residential real estate financing. The coronavirus pandemic could change the dynamics within the commercial real estate market. The pandemic hit the segments of this market with differing intensities. Prices for retail properties fell, for instance.

All things considered, the Committee’s assessment is that the factors fostering the build-up of vulnerabilities in the German financial system still exist. Since the coronavirus pandemic has contributed to a strong rise in debt, in particular in the corporate sector, this has become more of a focus. At the same time, the upswing in the residential real estate market continued apace. The Committee will be keeping a watchful eye on ongoing developments and regularly reassessing the risk situation.

In addition to the impact of the coronavirus pandemic, the Committee also discussed risks arising from the United Kingdom’s departure from the EU. It moreover addressed the regulation and supervision of central counterparties (CCPs) and the implications for financial stability. In the Committee’s view, German CCPs have proven resilient in the face of the pandemic. Another topic explored by the Committee were cyber risks and their potential impact on the stability of the financial system. It also used the disruptions to the TARGET2 payment system as an occasion to discuss the risks a TARGET2 outage would pose for financial stability. Ultimately, threats to financial stability might particularly arise if, the TARGET2 system is down for multiple days.

During the reporting period, the Committee reviewed its strategy and revised it materially. Amongst other things, the experience gained from the recommendations on instruments for the real estate market and on the countercyclical capital buffer were taken into account. The Committee also took due account of insights from the German Country Peer Review by the Financial Stability Board (FSB). The new strategy explicitly includes the macroprudential policy cycle and highlights the importance of communication for macroprudential policy. In this context, the Committee set up a website (www.afs-bund.de) as a central gateway to inform the general public about its work.