Voting rights advisers criticize Commerzbank’s remuneration system

Frankfurt The Commerzbank is holding a virtual general meeting for the first time this year because of the corona crisis. But even without protests from small shareholders on site, there will be no shortage of critical topics at the event on May 13.

Added to this is the criticism of Commerzbank’s remuneration system. The influential voting rights advisor Glass Lewis and his German subsidiary Ivox recommend that shareholders reject the slightly modified remuneration system for members of the Management Board in March 2020. This emerges from the recommendations of both companies for the Annual General Meeting, which are available to the Handelsblatt.

“From our point of view, there is great potential for improvement in the company’s remuneration policy,” says the Glass Lewis study. The goals on which the variable remuneration of the Board of Directors depends are too vague and too focused on the bank’s performance in the past.

Anglo-Saxon investors in particular often follow the advice of proxy advisors such as Glass Lewis and ISS at general meetings. If the Commerzbank shareholders did not endorse the remuneration system, the Supervisory Board would have to deal with it again. Germany’s second largest private bank did not want to comment on this.

Criticism of the number of positions

In his study, Ivox also speaks out against the planned election of Jutta Dönges to the Commerzbank Supervisory Board. The co-boss of the finance agency is to be elected as the new representative of the federal government to the control committee in May – together with Frank Czichowski from the KfW development bank.

Dönges and Czichowski are to replace State Secretary Markus Kerber and Anja Mikus, who heads the State Fund for Nuclear Waste Management. After Commerzbank’s rescue from the crisis, the federal government still has a good 15 percent stake in the bank – and anything but satisfied with the development of the money house in recent years. In Berlin, some have hopes that Dönges and Czichowski can give new impetus to the supervisory board.

But at least Ivox has reservations about the Dönges personnel. There are no doubts about the manager’s qualifications, according to the study based on guidelines of the BVI fund association. “However, there are concerns about the number of mandates.”

Dönges is already a member of the supervisory bodies of the FMS Wertmanagement and the Deutsche Pfandbriefbank. In addition, there is her job as managing director of the finance agency, which Ivox rates as an “executive position” like two mandates.

According to this method of counting, your work on the Commerzbank Supervisory Board would be your fifth mandate. And that would be two more mandates than Ivox recommends for people in an “executive position”. “Therefore, this election should be viewed very critically,” said the voting rights advisor.

The finance agency did not want to comment on Ivox’s criticism. However, a spokeswoman pointed out that Dönges had resigned from the supervisory board of Eurex Clearing in order to avoid conflicts of interest.

In contrast to Ivox, the parent company Glass Lewis has no objection to the choice of Dönges. Other persons familiar with the personnel also consider the appointment to be sensible, after all the financial agency manages the federal government’s participation in Commerzbank and is in close contact with the institute anyway.

Dönges is also highly valued in Berlin because it closely monitored the Commerzbank strategy review. Some also believe that Dönges’ work at FMS Wertmanagement cannot be viewed as a full supervisory mandate.

More concrete goals for 2020

The core remuneration system for Commerzbank board members has existed for several years. In March it was slightly adjusted to take account of the new requirements of the second Shareholder Rights Directive (ARUG II) and the new version of the German Corporate Governance Code. The most important innovation is that a maximum remuneration for each member of the Board of Management of six million euros per fiscal year has now been fixed.

The variable remuneration of the Management Board depends 70 percent on the achievement of the Group’s goals and 30 percent on the development of the department for which the respective Management Board member is responsible. In addition, individual goals have an impact on the amount of bonus payments.

When calculating the variable remuneration for 2019, the development of the bank and the respective department in 2017, 2018 and 2019 is taken into account. Glass Lewis criticizes this approach as backward and advocates “forward-looking” goals. However, this would have the consequence that Commerzbank could not set the bonus payments for 2019 until 2021 – and that the actual payment to the Management Board would then be postponed even further.

Voting rights advisers also take a critical view of the fact that the expectations of the Management Board are not described clearly enough. The performance goals are “only presented in a descriptive manner, but not clearly disclosed,” complains Ivox. As a result, it is not understandable for shareholders whether the goals for the Management Board are ambitious enough, emphasizes Glass Lewis.

Strictly speaking, these comments do not refer to the remuneration system, but to the remuneration report, which the Annual General Meeting does not vote on this year. Nevertheless, there are employees within Commerzbank who find this criticism justified. According to financial circles, the goals for the Executive Board in the 2020 financial year have therefore already been formulated more specifically.

It is of course another matter whether there will be any significant bonus payments in view of the Corona crisis 2020. In addition, the payment of Commerzbank management is generally rather below average compared to other institutions. In the past year, the total remuneration of the Management Board amounted to EUR 12.1 million. At the neighbourhouse Deutsche Bank the executive committee received almost three times as much despite a loss of billions.

Assistance: Jakob Blume

More: Bank President Zielke: “Must review Corona business model”

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False incentives, fraud, debt: the side effects of the corona crisis

The Chancellor is in top form in times of corona crisis. Angela Merkel explains complicated population doubling rates and reproductive numbers. But she also knows everyday things. “They have to be washed or ironed regularly, put in the oven or in the microwave,” Merkel explains how to care for respiratory masks. “Even if that sounds a bit housewife, so to speak.”

The omniscient state – embodied in the chancellor. The subjects are explained life down to the smallest detail. With this self-image, Merkel takes “measures that have never existed in our country before”. Fundamental rights are restricted, the economy is pushed to the brink and then supported with unprecedented aid.

One of Merkel’s closest confidants, Peter Altmaier, is more than enthusiastic. “An uncle who brings something is better than an aunt who plays the piano”, the Federal Minister of Economics remembers of his childhood.

And what is brought along! If you add up everything the federal government now wants to offer to combat the corona crisis, you get a gigantic sum of at least 1.2 trillion euros. No other country in the world has raised so much money in relation to its economic strength.

Germany has a full 35 percent, far more than the EU average or the USA. Federal finance minister Olaf Scholz did not understate what he promised a few weeks ago: “It is not spilled, but padding.”

graphic

The increase in importance and power is unique. Never in the history of the Federal Republic has a government intervened so quickly and deeply in public life and thus in the economy. After the financial crisis, German government debt rose by 315 billion euros in one year. The value of the federal, state and local governments will be far exceeded in this crisis. “I am worried whether we will be able to return to normal economic policy,” says Lars Feld, Germany’s top economy.

The measures to protect health are understandable. But the question increasingly arises: what side effects do the multi-billion dollar rescue programs have? The free market is disturbed, competition is distorted, prices lose their signal strength.

“As much market as possible, as much state as necessary”, the famous words of former Federal Minister of Economics Karl Schiller lose their meaning every day.

There is a risk of higher prices, inefficient companies and loss of wealth. It is significant that more and more companies are turning to the Bundeskartellamt during the corona crisis in order to be exempted from cooperating with competitors. The new spirit of state economy speaks.

Spend as much as you can. The year 2020 will be disastrous. Kristalina Georgiewa (IMF chief)

Certainly, help for companies with no fault of their own must be provided. But with the flood of support funds, the risk of misallocation is high. Capital and labor are tied up in companies with below-average productivity, less investment and innovative strength.

A few weeks ago, after a parliamentary request from the FDP for possible support from zombie companies, the Federal Ministry of Finance had to admit that “necessary market processes of creative destruction are hindered”.

The concern is justified that the state is eating itself too deeply into the economy, throwing privacy and data protection partially overboard and that the influence on the market will not be reversed after the end of the crisis.

A look at history suggests little good. The federal government is still 25 years after the IPO Deutsche Telekom still the largest single shareholder.

Fundamentally, there is a problem that is known in the economy as moral hazard: companies and citizens behave irresponsibly or carelessly due to existing false incentives. The news of fraudsters sneaking up subsidies is increasing.

“The state is a lousy entrepreneur”

The appearances of Altmaier and Scholz are characterized by superlatives. At the federal press conference, they will be presenting the rescue packages worth billions to the public with great regularity. “This is the most comprehensive and effective guarantee that there has ever been in a crisis,” said Altmaier in mid-March. “This is the bazooka, we’ll look for small arms later,” the Federal Minister of Finance said at the appearance.

The small arms that have now been added are quite large-caliber. Scholz announced a debt-financed supplementary budget of 156 billion euros. This includes an emergency fund with a volume of 50 billion euros, which is aimed at the self-employed and small businesses with up to ten employees.

The federal guarantee for the state bank KfW is increased by up to 450 billion euros. And then there is an Economic Stabilization Fund (WSF) with a volume of 600 billion euros. The majority is earmarked for government guarantees to keep companies liquid.

100 billion euros are reserved for possible investments, i.e. partial nationalization of companies. The battered Lufthansa is already holding talks about state participation.

You can still hear Altmaier’s words: “The state is a lousy entrepreneur.” The Federal Minister of Economics at least dedicated the most beautiful hall in the ministry to Ludwig Erhard. But he is currently just as far away from Erhard’s mantra as the Germans are from summer leaves in Mallorca.

Minister of Economics Peter Altmaier (standing) and Minister of Finance Olaf Scholz (front)

The father of the “German economic miracle” throbbed to measure, he remembered sentences, the state should not be a player, but an arbitrator in the economy. Now the state is preparing to take over the entire football club.

No other industrial country is helping its economy with such large sums as the Federal Republic. This shows a new evaluation by the International Monetary Fund (IMF). He does not criticize Germany, on the contrary. “Spend as much as you can,” advises IMF chief Kristalina Georgiewa. The economic situation is too depressing.

The Council of Experts is now assuming that the economy will decline by more than 5.5 percent this year. This is the case that was previously treated as a worst-case scenario. The economic downturn would be worse than in the global financial crisis. 725,000 companies have registered financial difficulties and short-time work.

Including: hospitals. Health Minister Jens Spahn ordered them at the beginning of March to postpone all planned operations. For the hospital operator, this means severe revenue losses. More than a third of the intensive care beds are not occupied. With the Hospital Relief Act, the federal government created a regulation to compensate the clinics for the failures. But that’s far from enough.

This is the bazooka, we’ll look at small arms later. Olaf Scholz (Federal Minister of Finance)

Some private organizations have registered short-time work, including the Schön-Klinik group. The head of the German Hospital Society, Gerald Gaß, sees the time for a “careful, gradual resumption of regular care”.

Spahn also said last week that clinics could “gradually return to normal”. “We do not want to keep 40 percent of the intensive care ventilation beds in Germany permanently”, said the minister.

The pressure on the companies is huge, the need for help is great. This year alone, the federal government is raising 156 billion euros in new debt. The federal states are also preparing an extensive flood of money for pumps.

According to a survey by the Handelsblatt newspaper among the 16 state finance ministries, they are currently planning 65 billion euros in new debt to fight the crisis. In addition to the federal government’s huge € 1.2 trillion rescue package, the federal states are also helping their companies and the self-employed. Bavaria alone has launched a fund with 60 billion euros.

The IMF chief not only welcomes the gigantic aid package in Germany, the monetary fund also calls for thorough control. “Keep the bills,” said Georgiewa. Transparency and accountability should not be put off in the face of the crisis. Whether Germany is world champion in this discipline, doubts are increasing.

Risk zombie company

The financial crisis shaped a saying by the former head of central bank in Europe, Mario Draghi: “What ever it takes”. In this crisis, it becomes a “Whatever, take it!” Aid is mostly spent without checking, the money cannot be distributed quickly enough.

According to an overview by the Ministry of Finance and the Ministry of Economics, over 26 billion euros were applied for by KfW Hilfen. Almost 13,000 of the more than 13,200 applications were approved. In other words, almost anyone who wants help gets it, most likely companies that didn’t have a working business model before the pandemic.

This easily creates zombie companies that are only alive because of generous state aid. After all: With the large sums, the KfW steering committee seems to be examining it more closely. So far, around 8.5 billion euros have been approved. So it takes a little longer for the large-volume applications.

In contrast, the self-employed and small businesses with up to ten employees are suspiciously fast. So far, according to the overview of 1.65 million applications, around 1.1 million have been approved and more than nine billion euros paid out. These are not loans, but aid that does not have to be repaid.

“Speed ​​and thoroughness go hand in hand: it is carefully checked who receives the money,” Finance Minister Scholz promised. But is that true? North Rhine-Westphalia and Berlin were even recently forced to suspend immediate payments because large-scale fraudsters wanted to get to the pots.

There are also problems with honest entrepreneurs. In North Rhine-Westphalia, for example, the self-employed and small businesses are always granted the maximum amounts of EUR 9,000 and EUR 15,000 – regardless of need. This practice is not well understood in the Federal Ministry of Economics. Because a flat-rate payment of maximum amounts was actually not intended.

The aid should amount to up to 9,000 euros for companies with up to five employees and up to 15,000 euros for up to ten employees. The emphasis here is on the “up to”. According to the Ministry of Economic Affairs, the actual amount should be based on sales and operating expenses for the next three months. An entrepreneur with zero euros turnover and 1000 euros costs would be entitled to 3000 euros in emergency aid.

But these details were lost somewhere in the confusion between the federal states and the federal states. The up to 50 billion euros are provided by the federal government. Although federal money is at stake, it is up to the federal states how much they scrutinize companies. In Hamburg, for example, a liquidity check is required. Other countries are significantly less strict so that aid can flow as quickly as possible.

In Berlin, more than a billion euros were paid out to solo and small entrepreneurs within days. And the Berlin Senate also admits behind the scenes that surely there are also deadweight effects. Since no examination was carried out, almost everyone received 14,000 euros in a combination of federal and state funds. These include the self-employed, who normally have annual sales that are significantly lower, they say.

Some recipients are now voluntarily repaying the aid for fear of sanctions. But whether a subsequent thorough examination is possible to convince fraudsters is skeptical in financial management.

Dangerous false incentives

The economic nonsense, which is operated partly in the name of Corona, is great. Governments in the federal and state governments are increasingly creating the illusion that they can regulate everything with state trillions. And more and more, government intervention and expansion is creating false incentives in all areas of the economy, which can be revenged bitterly.

Take the housing market as an example: the Federal Minister of Justice, a woman from the SPD, wanted to protect the tenants. The result is a half-baked law that gets small landlords into trouble. The law was so badly made that solvent companies like Adidas or Deichmann used the gaps and simply suspended the rent payments. Only after a storm of indignation did Adidas row back.

Take the example of KfW loans: After the institutes hesitated to pass on the subsidized loans from the Staatsbank KfW to companies because they still had to bear ten percent of the default risk, the state assumed full liability. With the danger that house banks will now be able to provide loans to companies that have long been bankrupt.

The banks don’t care, they are released from any liability, but of course they still make good money from their business. The fool is the taxpayer who has to answer for the defaults.

Example of short-time work: Short-time work allowance is a tried and tested crisis instrument. The state replaces up to 67 percent of net wages. However, the SPD was not enough. In the coalition committee on Wednesday, she pushed for an increase to 80 percent.

It is the most comprehensive and effective guarantee that there has ever been in a crisis. Peter Altmaier (Federal Minister of Economics)

However, a general increase would have significant deadweight effects: Many companies are already increasing short-time benefits from their own resources. Apart from that, the short-time work allowance is not meant to secure the standard of living, but rather to ensure the survival of companies and thus avoid unemployment.

In other areas, the federal corona strategy is rather arbitrary. The craft complained that the vehicle registration offices were closed. There is also much discussion about opening shops up to the limit of 800 square meters. This border was communicated at least improperly and caused confusion and indignation among the shopkeepers.

Now a Hamburg administrative court has declared the 800 square meter rule to be illegal. The court could not understand why opening larger sales areas alone should attract more people to the city center. Necessary infection protection measures could be followed at least as well in larger stores as in smaller facilities.

Whimsical and impractical was initially the requirement that repair shops were allowed to remain open, but the sales rooms had to be closed. Many craftsmen wondered if they could lead the customers through the sales room into the workshop. Another detail from this series of undesirable side effects of the rescue policy.

The border closures, for example with the Czech Republic, mean that the bricklayers are missing in the construction industry and the harvest workers in agriculture from Romania. The state decides a lot, but the consequences are borne by the entrepreneurs and their employees.

The argument for the state’s rapid generosity in the crisis is: rather spend more now to prevent the economy from crashing and millions of jobs be lost than have to finance mass unemployment for a long time. This approach is absolutely correct. But it also remains true: somehow the state rescue billions have to be financed at least in the medium term if the next generations are not to be overwhelmed.

Currently this is done through the use of reserves and debts. Germany certainly has scope. The Federal Republic had just pushed the debt level to below 60 percent, thereby meeting the Maastricht criteria for the first time in many years in 2019. But that will be the last time for a long time.

As a result of the corona crisis, the federal government expects a general government deficit of 7.25 percent of gross domestic product (GDP) this year. The debt ratio as a share of all debts in GDP is estimated at 75.25 percent, as can be seen from the German Stability Program 2020.

“The projection is currently subject to very high levels of uncertainty,” says the current report. In other words, the debt level could be even higher. This mainly depends on how high the losses are that the federal government will incur from its guarantees and sureties.

Given the huge commitments, some in the grand coalition are trying to put the brakes on. “I don’t like the fact that we almost always get new suggestions every hour, what else can you do,” said Union leader Ralph Brinkhaus. “All of this must also be paid for.”

In a crisis, the state’s money is loose. Some sense their chance to finally implement long-held plans.

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Economy warns of exaggeration in the fight against Corona

Dusseldorf The Chairman of the Council of Experts, Lars Feld, urges the Federal Government to take measures to fight the corona crisis. “Above all, what is currently being discussed is problematic. You get the impression that every industry wants specific support, ”Feld told the Handelsblatt.

The hospitality industry wants the reduced VAT rate that has now been decided. The auto industry is again asking for a scrappage premium, and retailing vouchers, says Feld. “You could go on almost any way – who doesn’t have one yet, who wants to do it again.”

“If you go this route, you will hardly be able to catch it afterwards in terms of fiscal policy,” warns the head of the Freiburg Walter Eucken Institute. This applies “also to social policy measures such as the increase in short-time work benefits or the extension of the duration of unemployment benefits”. “I’m more worried about whether we will be able to return to normal economic policy,” says Feld.

The economist also disapproves of the federal government’s policy on industrial policy: “If Corona is now used to quietly implement questionable industrial policy goals, I find that unacceptable.”

Specifically, it refers to the recent tightening of the Foreign Trade and Payments Act. “The goal of building a fortress Europe is definitely the wrong way to go,” said Feld. Germany in particular, as the largest economy, must speak out for openness. “We cannot leave the Dutch alone to stand up for a market economy policy,” he warns.

He expressly warns against the introduction of a property tax. “To talk about a property tax in this situation is insane. The best way to pay off the debt is with an intelligent growth strategy, ”said Feld.

Read the full interview here:

Mr. Feld, you are considered the nation’s regulatory conscience. The state experiences something of self-empowerment in corona times. What scares you more: the virus or the political measures against it?
“Fear” is the wrong expression in both respects. I know the medical problems abstractly, but I don’t feel any threat. Of course, this can change quickly if I experience illnesses in my personal environment. This is often the case. As far as the state measures in the fight against the crisis are concerned, I am not afraid either, I am more concerned that we will be able to return to normal economic policy.

The state intervenes massively in contract law, it relaxes bankruptcy law, it communitises risks. In your opinion, is that all still proportionate?
Overall, I think the aid package is proportionate. You can argue about individual measures, especially with tenancy law. However, one has to say that the state there has been massively interfering with freedom of contract for a long time: through the rent brake or the rent cover in Berlin, which is probably unconstitutional. I criticized that before Corona – and I’m also criticizing it now.

So you don’t see a new quality of state intervention?
But, above all, what is currently being discussed is problematic. One has the impression that each branch wants specific support. The hospitality industry wants the reduced VAT rate that has now been decided. The auto industry is again asking for a scrappage premium, and retailers are demanding consumer vouchers. This could be continued almost indefinitely: Who has not yet, who wants again?

If you go this route, you will hardly be able to catch it afterwards in terms of fiscal policy. Ultimately, this also applies to social policy measures such as raising short-time working benefits or extending the duration of unemployment benefits.

The current bailout package is well over a trillion euros, i.e. more than three times the federal budget – these are sums that recently seemed unthinkable. Will the state’s calculation work, so now to save jobs, will it cost what it wants? Otherwise, the state would have to pay for the millions of unemployed anyway …
Yes, the sums are big. However, many simply add up everything that is put in the shop window – loans, grants, guarantees and guarantees. You have to take into account that not everything has an impact on expenditure, loans are repaid and guarantees are not drawn. The decisive factor is whether the measures are targeted.

Where do you see the debt ratio in the medium term?
By the end of 2021, we will probably be back to around 80 percent of economic output, roughly the level we had at the end of the financial crisis.

Do you think politics and science still have an overview? When was it that the state had to keep thousands of companies alive – and probably for months?
I don’t think the state will be able to maintain this for months. It can mitigate the consequences, but it will not be able to save all companies and jobs. We will have bankruptcies. Ultimately, it’s about helping companies that have a viable business model over this cliff. It should not be forgotten that companies are in this situation because the state massively restricts our freedoms during the pandemic. If there were a claim for compensation from the state, the whole thing would be more expensive.

Who pays the bill in the end? There is already debate about balancing the burden …
There is, of course, this debate, but it is a harmful one, with a particular focus on the ideological interests of the parties. To talk about a wealth tax in this situation is insane. The best way to pay off your debt is to use a smart growth strategy.

What do you think of the fact that the private banks are now providing KfW loans with a volume of up to 800.000 euros no longer have to assume any liability, so get a 100 percent guarantee from the state?
If you bear in mind the Federal Government’s goal of mitigating corona-related defaults with liquidity aid, that makes perfect sense. Of course, it is cleaner from a regulatory perspective to take the banks at risk. But then the measure would not work. Even with a liability of only ten percent, banks are very hesitant to grant loans in this difficult situation. Of course, we cannot grant such KfW loans on a permanent basis.

We cannot leave the Dutch alone to stand up for a market economy policy.

But isn’t that a disguised bank bailout program?
I would not say that. It dissolves the risk aversion of privately liable bank executives. Ultimately, credit-based liquidity support is hardly an option for many companies currently affected, provided they would become excessively in debt.

Another instrument that is often mentioned is government participation. Will it happen?
I cannot imagine that we can do without state participation in certain industries – for example, with airlines. Until the Lufthansa back to pre-crisis levels, it may take a long time. The decisive factor is whether they are silent participations or whether the state wants to exercise control rights. I prefer the former because with a stock package it usually takes longer for the state to withdraw.

The bank bailouts during the financial crisis in the USA are always considered exemplary, although there were equity investments …
Yes, that’s right, but the state quickly withdrew there. The following applies: If the control function, then please use the exit scenario.

They probably refer to Commerzbank, where the state is still involved after more than ten years.
Yes, it would be even more serious with massive industrial holdings like we used to have.

Now there was a trend towards industrial policy even before the corona crisis. The economics minister tightened the foreign trade law – and added again during the corona crisis: are we experiencing a turnaround?
Unfortunately, there is a turnaround. If Corona is now being used to quietly push through questionable industrial policy goals, I find it unacceptable.

Now this policy is being carried out by the CDU-led Ministry of Economic Affairs. Are we threatened by French conditions?
The goal of building a fortress Europe is definitely the wrong way to go. Germany in particular, as the largest economy, must speak out for openness. We cannot leave the Dutch alone to stand up for a market economy policy.

Isn’t there a good reason to protect some industries – when it comes to security, for example in the case of the Chinese network supplier Huawei?
Of course, the state has to look when a state investor from China is investing in critical infrastructure. But now that doesn’t just apply to China. American investors are now being looked at just as critically. A systematic foreclosure strategy threatens. What is considered “safety-relevant” must therefore be clearly defined.

The law speaks of an “expected impairment” of public order or security. There seem to be no limits to arbitrariness, right?
The Ministry of Economy is now keeping everything open to prevent any takeovers. The whole thing is also enriched with a participation facility and the economic stabilization fund. It is a very unfortunate combination.

Even mouth protection and protective clothing are considered to be safety-relevant. They may be relevant to health, but they do not have to be produced in Germany. In this case, the state must create strategic reserves.

Back to the economic risks again. If the lockdown has such devastating consequences in Germany, what about countries like Spain and Italy that are already heavily indebted?
There is no way around these countries pursuing an expansionary fiscal policy and driving up debt levels. There is no alternative in the face of this great crisis.

Aid programs such as those in Germany cannot be afforded by these countries, which have been hit much harder by the corona crisis …
I wouldn’t say that in general. Spain and France have enough leeway with a debt ratio of 100 percent. I think 120 percent would be possible without them being in the focus of the financial markets.

Italy, which has a debt ratio of almost 140 percent, financial market players have long had their sights on them. Only thanks to the massive intervention of the ECB has interest rates dropped to a tolerable level again …
Yes, Italy is the real problem. The government debt there is moving towards Greek dimensions in terms of economic performance – and this is about a G7 country.

As far as the corona pandemic is concerned, Italy is not in debt to this crisis. Regulatory policy or not: Do you understand Italy’s prime minister, who vehemently demands the solidarity of the strong countries?
I differentiate between understanding and acceptance. I understand that Italy needs support given the many deaths. And I understand that the Italians are now doing everything they can to protect themselves against possible distortions in the financial markets with external help. What I cannot accept is Premier Conte’s blackmail strategy, which is unique in its sharpness.

Isn’t this attitude due to sheer misery?
That may be the case, but the extortionate approach could end up being counterproductive. The government cannot credibly threaten to exit the euro because the economy would collapse completely.

But the Italians know very well that an exit from Italy would very quickly result in a collapse of the monetary union, which the rest of Europe can hardly afford …
This may be. Nevertheless, Conte’s strategy is questionable because Italy would suffer much more. In Italy, therefore, there is rightly a debate as to whether the prime minister does not overdraw. Italy is well supplied with the funds that have been made available – i.e. the scarcely conditioned loans from the ESM rescue fund with the possibility for the ECB to buy unlimited government bonds (OMT).

I reject joint and several liability. That would be a fall for me.

Italy insists on corona bonds, i.e. the joint borrowing for this crisis. Wouldn’t that be an important symbolic signal for Europe’s cohesion?
No, I’m completely the politician of order. I reject joint and several liability. That would be a fall for me.

But isn’t it the more honest way in the end? A communitization of risks has long been taking place through the ECB’s balance sheet, an institution that is not at all legitimized for such a redistribution policy …
Again, joint and several liability between states is out of the question for me. Other forms of joint liability, such as joint liability or guarantees for debt, can be discussed.

Discussions about a fund at EU level – possibly parallel to the ESM – that is financed by bonds guaranteed by member states and from which transfers are paid – all of this is conceivable. The problem with joint and several liability: Here the creditor can pick out the most solvent country – and force it to be repaid.

The crisis could hit the emerging markets even more severely than Italy. We are obviously experiencing a crisis of a whole new dimension. Not only almost all industries are affected, but also all regions of the world – at the same time. Some already compare the economic consequences with the Great Depression in the 1930s. Do you think this is alarmist?
No, I don’t think it’s alarmist. There are parallels as to the dimension of the economic downturn; but not on the job market. In addition, the reasons are completely different. The current crisis cannot be compared with the Spanish flu either. At that time after the First World War, the economies were very weak.

The fact is: A crisis as we are now experiencing it is unique. It is not only the slump in the economy as a result of the lockdown, but also the interruption of the international supply chains.

How do you explain that the markets are still reacting almost moderately?
The markets are still assuming that the gigantic rescue packages will help to overcome the liquidity problems. Whether this will really be the case depends on the further development of the pandemic. I would therefore not rule out further slumps in the financial markets.

The Ifo Institute anticipates a 20 percent drop in GDP in the worst scenario. Do you think such a scenario is conceivable?
I’m not that pessimistic. The 20 percent of the Ifo Institute is an annual projection, not an annualized quarter. This means that the relatively robust first quarter is included, so that the economy would not get on its feet in the third and fourth quarters.

At the moment, almost all countries except Sweden are pursuing the same corona strategy: lockdown, bans on contacts and so on. There has never been an experiment like this. Could this strategy turn out to be a global mistake in the end?
Afterwards we’ll be smarter. Yes, there are voices that can be taken seriously and say that we unnecessarily stall the economy. Only: If we look at the infection curves and compare them with other flu waves, we see that the rise at Corona is much steeper. If we let it go, significantly more deaths would be unavoidable. So I think trying to flatten the curve so as not to overload the health system is the right strategy.

Finally, a personal question: It was not long ago that your colleague Peter Bofinger from Würzburg was the last Keynesian. But now conservative economists are also calling for massive government intervention. Ifo boss Clemens Fuest, for example, or IW boss Michael Hüther, who most recently spoke in favor of corona bonds. Do you sometimes feel like the last politician in the country?
Do not worry. There are still a large number of economists who think in terms of regulatory policy. In addition, I am just as pragmatic as my colleagues in this unique crisis that we are currently experiencing.

Mr. Feld, thank you very much for the interview.

More: EU summit: These are ideas for financing the EU reconstruction funds

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“Without a state, it is currently not possible”

Frankfurt After the financial crisis, the rules for banks were tightened significantly. The corona pandemic now shows where the new rules work and where they don’t. Bundesbank board member Joachim Wuermeling is overall satisfied with the result. Nevertheless, he stated in the Handelsblatt interview that the financial institutions alone would be overwhelmed with the sharp rise in credit requirements in the corona crisis. “That is why it is currently not possible without the state as the guarantor.”

As part of a special program of the KfW promotional banks, the institutes grant loans in the corona crisis for which the state is 80, 90 or even 100 percent liable. From Wuermeling’s point of view, this is a good solution, after all, banks should not be able to provide enough loans if they cannot count on repayment. “If the state nevertheless wants to help companies for good reasons, it takes on the risks in the interest of the common good.”

The German banks are doing well in the corona crisis “according to the circumstances,” says Wuermeling. However, he fears that there will be more bankruptcies and loan defaults.

“The credit risks are really our biggest concern.” And they will only be reflected in the bank balance sheets with a delay. “I expect the burdens to increase significantly in the third or fourth quarter.”

Wuermeling rejects the creation of a European bad bank to reduce bad loans, as suggested by the ECB’s banking supervision. “This proposal is basically three years old and was not followed up for good reasons at the time.”

The top ECB bank supervisor Andrea Enria had already asked for a bad bank in 2017 in his old role as head of the banking authority Eba. “The reduction in non-performing loans has since made good progress even without such an institution, thanks in part to the resolute crackdown by the European banking supervisory authority SSM, which Andrea Enria now heads,” said Wuermeling. “That is why I do not believe that the initiative from that time will be taken up again at EU level.”

Read the full interview here:

Mr. Wuermeling, how are German banks doing in the corona crisis?
According to the circumstances, the German banks are still doing well. They currently have capital buffers in the hundreds of billions, with which they can grant loans and also cushion losses from loan losses.

In view of the corona crisis, do banks have to put their goals and strategies to the test?
It is already happening. Due to the corona crisis, all institutes are forced to update their earnings forecast for the current year. Returns are falling and risk provisioning is increasing. And after the height of the crisis, many banks will have to review their strategies. The pressure on banks with business models that were vulnerable before the crisis will continue to increase

How dangerous can bank failures and loan defaults become for the banks?
Credit risks are actually the biggest concern for us. Market and liquidity risks leave their mark immediately, but are likely to remain limited overall. By contrast, the losses caused by loan defaults are reflected in the bank balance sheets with a delay of weeks and months. I expect the burdens to increase significantly in the third or fourth quarter.

Can the next banking crisis develop from the corona crisis?
The German banking system is very resilient today. But this question can only be answered reliably if we have more clarity: about the containment of the epidemic, the economic effects and how well the government countermeasures such as the loans from the KfW development bank or the short-time allowance cushion the negative effects on the economy and how quickly the recession can be overcome. It was important that the state acted quickly and comprehensively. As of today, the expected losses should be manageable for the overall market.

Federal Minister of Finance Olaf Scholz recommended that the institutes “let five be straight” when lending. Are the banks too hesitant?
In my opinion, the banks have shown great willingness so far to ensure that the real economy is supplied with credit. But you cannot bear all the risks of a shutdown of the entire economy. The supervisory authority expects banks to carry out a responsible risk assessment even in times of crisis. If the banks simply opened all the gates when lending, sooner or later this would lead to a crisis in the banks. That would not help anyone.

The state assumes 80, 90 or even 100 percent of the liability for many loans. Right?
Banks should provide the real economy with credit even in times of crisis. But a responsible credit policy also means that banks reject loan applications if they cannot expect the loan to be repaid. If the state nevertheless wants to help companies for good reasons, it assumes the risks in the interest of the common good.

What is your interim conclusion for the banking sector after about two months of corona crisis?
It is now clear that we have learned the right lessons from the 2008 financial crisis by building up capital and liquidity buffers. The larger the buffers are, the longer banks are able to perform their tasks even in difficult times. In this respect, it was right to insist that these buffers be called for. The second good news is that the banking system works under the current circumstances. Consumers and businesses can access banking services even when many branches are closed. However, a single bank or savings bank can only prepare itself to a limited extent against a comprehensive threat to the solvency of a large number of borrowers.

So such crises cannot be overcome without state aid?
The banking system alone cannot cope with an extremely sharp rise in credit demand in the economy. That is why it is currently not possible without the state as the guarantor. We see it that way as a supervisor. If we discuss the lessons of the crisis at a later point in time, it will certainly be discussed.

What could solutions look like?
Instruments have now been developed ad hoc under high time pressure to use government aid quickly and in a targeted manner. Fortunately, in Germany we have established channels through KfW and other promotional banks to provide loans with government guarantees to the real economy relatively quickly via the banking system. In future, the regulatory framework for such measures must be designed in such a way that it can take full effect immediately

What do you think of the top ECB supervisor Andrea Enria’s proposal to set up a European bad bank? This could solve the problem of old bad loans before new bad loans are added in the wake of the corona crisis.
This proposal is essentially three years old and was not followed up at that time for good reasons. The reduction in non-performing loans has since made good progress even without such an institution, also thanks to the resolute crackdown by the European banking regulator SSM, which Andrea Enria now heads. That is why I do not believe that the initiative from that time will be taken up again at EU level.

BdB President Hans-Walter Peters, who has just left office, has demanded that the ECB should reimburse the banks already paid negative interest of 26.5 billion euros so that they can grant more loans in the corona crisis. What do you think of the idea?
There is no need to return negative interest at all. It is not a targeted levy for banks, but a monetary policy measure. Banks have to learn to deal with it.

Mr Peters also suggested that the ECB should buy subordinated bank bonds in order to strengthen the capital of the financial institutions.
In my view, that would also not be appropriate. Central banks in the euro zone are currently only buying senior bonds for risk reasons. In addition, the purchase of subordinated bank bonds from supervised institutions would also represent a conflict of interest for the central bank.

Do you think the banks’ demands for more aid are fundamentally absurd?
The previous easing should give the banks enough scope for more credit and loss absorption. It annoys me when now long-discussed proposals come up with the new coat of “crisis measure” on the table, for example the general recognition of self-developed software as equity. This distracts us all from the real challenge.

Before Corona, banking regulators demanded that banks cut costs and increase profitability. Are these demands still valid in the corona crisis?
If you want to act responsibly in the crisis, you have to set your priorities from now on. It is a top priority for us that bank operations and the cash flow are maintained – even when branches are closed and many bank employees work from home. That worked. And we want to make sure that banks continue to perform their important economic functions and lend without risking their stability. This shifted focus in no way means that all other aspects are now irrelevant in the long run. We will come back to this when the acute crisis has been overcome.

Financial supervision has loosened the rules for financial institutions significantly in the wake of the corona crisis. How long should these facilities apply?
The decisions for the exemptions were not easy for us. They can only serve to overcome the crisis. Nobody should bet that they will last forever. Of course, the banks will have the necessary time to regain their normal state of capital and liquidity. But everyone must be aware that we will pull the reins back after the crisis.

Will there be adjustments to banking supervision after the corona crisis?
One lesson from the crisis is that we still have to use digital technologies to a much greater extent in order to get an easier and faster picture of the situation of the banks. In the corona crisis, we initially spoke to large banks every day about their liquidity in a conference call. In the future, it would make sense to be able to access this data directly from the banks’ systems at any time.

How quickly can this be introduced?
The digital motto “think big, start small” should apply. In countries like Israel, the supervisory authority is already checking the liquidity indicators directly in the databases of the institutes. In Europe, we should first concentrate on simple indicators, where timeliness plays an important role. This would allow us to identify problems earlier, act preventively and thus possibly prevent some damage before it arises.

How do you rate the recommendation of the European Banking Authority (SSM) not to distribute dividends – is this appropriate or is it exaggerated in its overall rate?
It is in the interest of financial stability that banks retain their capital in the current situation in order to cushion risks and to be able to grant loans. In my view, there would have been reasons in one or the other special case to allow distributions. But we need a uniform approach in the euro area.

Does the distribution ban also apply to savings banks and Volksbanks?
It is not a prohibition of dividends – this is not legally possible if the capital requirements are complied with – but a recommendation to postpone distributions until early October. We also expect small and medium-sized banks, which are supervised by BaFin and the Bundesbank, to follow this recommendation. And we are very happy that this happens.

What do you do if an incredibly heavily capitalized Volksbank wants to distribute part of its profits despite your urgent recommendation?
It is understandable that it is not easy for a very well positioned bank to follow this. However, this is a collective precaution by all European banks. Because of the epochal challenge posed by the pandemic for the economy and society throughout the euro area, capital should remain in the financial system for now. No bank should go out there. So far, banking supervision in Germany has mostly succeeded in convincing institutions of the usefulness of such measures

Mr. Wuermeling, thank you very much for the interview.

More: Banking Association President Zielke: “Must review Corona business model”

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Economists argue about stimulus programs

Berlin Scrappage bonus? VAT cut? Negative tax for companies? When the coalition committee draws up an interim assessment of the consequences of the economic standstill on Wednesday evening and provides advice on possible new aid for small and medium-sized businesses, the leaders of the Union and the SPD also want to include advice from economists. However, almost all of the proposals for an economic stimulus package to boost consumption are controversial among economists.

It starts with the question whether, in addition to the rescue aid that has already come into force, the economy needs a medium-term economic stimulus program to get it back on its feet. Yes, say Clemens Fuest, President of the Ifo Institute, and Marcel Fratzscher, President of the German Institute for Economic Research (DIW). “It is not enough just to avoid bankruptcies and unemployment,” said Fratzscher.

No, says Gabriel Felbermayr, President of the Kiel Institute for Economic Research (IfW). “Economic stimulus programs are pointless as long as economic activity is paralyzed by preventing social contacts,” he says. The government must now provide a credible, resilient plan to exit the lockdown. Veronika Grimm is more cautious about saying no to promoting consumption. It requires targeted modernization investments in digitization and climate protection.

Employees of Fratzschers DIW and Felbermayrs IfW even had a day-long Twitter exchange of blows about the need for economic support. After the leading economic research institutes, which included the DIW, the IfW and the Ifo, delivered their joint forecast to Economics Minister Peter Altmaier (CDU) last week, the DIW complained that his recommendations for an economic stimulus program had been kept outside by the other institutes .

More short-time work allowance? Broad tax cuts? “We don’t need all of that,” says Felbermayr. He is convinced: “If the companies’ equity base remains successful, then after the crisis they can continue where they had to stop because of the crisis.”

DIW

Marcel Fratzscher is President of the German Institute for Economic Research.

(Photo: imago / IPON)

He does not consider it necessary to strengthen purchasing power. “We save more than usual because we can consume less. The money is available for consumption as soon as the lockdown ends, ”he says.

In contrast, Fratzscher and Fuest are convinced that the crisis is so deep that the state must support the economy. Short-time work, for example, is associated with a loss of income. However, Fuest warns: “The state should use the money very specifically for additional measures”, after all, the national debt is already increasing rapidly.

With the short-time work allowance, for example, which Federal Labor Minister Hubertus Heil (SPD) wants to increase for everyone, Fuest suggests increasing it only for those who would otherwise fall under the social assistance limit. As with the solo self-employed, this could be done without a wealth check, says Fuest.

In the Union too, it was said, an increase can only be imagined for lower income groups. There are also voices from the CDU and CSU that have not yet decided on new aid programs, but want to monitor developments for two to three weeks.

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Fratzscher, in turn, wants to strengthen purchasing power through temporarily lower social contributions. That would also help employers. “Broad income tax cuts would now be of little use because they are more likely to help people with higher incomes,” said Fratzscher.

It is undisputed that the economy is suffering enormously from the contact bans imposed in mid-March. The figures that the Ministry of Economic Affairs had prepared for the coalition committee and which are available to the Handelsblatt describe a catastrophic situation.

By April 13, 725,000 companies had registered with the Federal Employment Agency for short-time work. The applications already examined concerned over one million employees. 13,000 companies have applied for liquidity aid from KfW amounting to 26 billion euros.

And 1.1 million small businesses were granted grants of nine billion euros. According to data from the HDE retail association, 70,000 hotels and restaurants are facing bankruptcy. In a lightning survey by KfW on the start-up platform, 90 percent of the self-employed indicated a drop in sales. “We are currently experiencing a massive economic downturn,” says Fuest.

Purchase premium in the criticism

The purchase premium demanded by the auto industry is particularly bad for the economists surveyed by the Handelsblatt. Fuest advises the government to consider what the 2009 scrappage bonus actually did before making a decision.

In no case does he want to see the bonus linked to the scrapping of old cars. Fratzscher thinks that a scrappage bonus could be an incentive to buy a car; but it must promote new drives. “If you can’t do this, the state should invest in charging stations instead of subsidizing the status quo,” he said.

The Veronika Grimm economy considers “a scrapping premium to be the wrong instrument”. It would “potentially bring hundreds of thousands of new petrol engines to the fleet and delay the transformation towards climate-friendly mobility,” she said.

The population is also against the premium, as a representative survey by the polling institute Civey shows, which is available to the Handelsblatt: 62 percent answer the question “Should the federal government support the purchase of new cars with a scrapping premium for old vehicles as a result of the corona pandemic?” “No, definitely not” and “rather no”.

It is better, says Grimm, that the state should invest money in the expansion of IT networks and in schools. This is all the more important since children from educationally disadvantaged classes would now suffer new disadvantages due to the school closings.

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Fuest also relies on targeted investments: “IT specialists are now available, so it would be the right time to reduce the IT backlog in administration,” he said. The digital skills of workers should also be trained. There was time for this during short-time work. “We now have free construction capacities that did not exist before Corona,” said Fuest, who therefore advises that public construction investments be preferred.

Fratzscher also demands the promotion of the domestic economy. “It will not work for Germany to export itself out of the crisis,” he said. Economic growth in key customer countries, such as China and the USA, is too weak for this.

Even the proposal to lower VAT is not well received by economists. On the one hand, with loss of revenue of twelve billion euros per percentage point, this is particularly expensive for the state treasury. Fratzscher also doubts that the relief would be passed on to customers. “It would therefore be a subsidy to companies that would not increase demand,” he said.

Fuest is also skeptical about a VAT cut that several prime ministers want for restaurants. “If you choose to do it, it would only be temporary,” he said. “But then later you would have the problem of getting out of this exception,” he fears.

Compensation for lost profits?

There is, however, one way that economists would go together: relief for companies that profit taxes do not have to be paid this year, but are postponed to other years through generous tax advances and tax returns. The companies would then come out of the corona crisis with significantly less debt.

IfW

Gabriel Felbermayr has been President of the Institute for the World Economy since March 2019.

(Photo: ifw-kiel)

This was suggested by the former economist Peter Bofinger. Immediate depreciation for investments is also widely supported. Felbermayr also thinks this makes sense. He also advocates a “negative tax”, where companies would be reimbursed for profits based on profit taxes for 2019 for 2020 – repayable from 2021.

Michael Hüther, head of the employers’ institute of the German economy (IW), had also asked for a negative tax. Fuest can also envisage government grants that would have to be repaid if profits flow again.

Bofinger even thinks that the companies could demand compensation from the state for their lockdown-related loss of profits. “You shouldn’t treat them like supplicants,” he said. “Hotels, for example, cannot help that they cannot do business.” The corona crisis is completely different from the financial crisis that bank managers caused.

“If the regulatory principle applies that responsibility and liability go hand in hand, then companies should get money from the state,” he says. Like the farmers after the tsunami: “The state did not take part in the farms in return,” said Bofinger.

More: Different sectors are affected to different degrees by the corona crisis. The state should therefore rely on industry-specific solutions to boost the economy again, says Handelsblatt editor-in-chief Sven Afhüppe.

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Nervousness before the big EU summit

Spain’s Prime Minister Pedro Sanchez presented a working paper in which he approached the federal government before the meeting. Like the EU Commission, he also envisions a huge reconstruction fund for the European economy amounting to 1.5 trillion euros.

But at least Sanchez wants to get around the biggest issue: that of common European public debt. Instead, Sanchez’s funding of the fund is based on the Brussels proposal, which is not met with frontal rejection in the federal government.

The idea of ​​the EU Commission is based on guarantees from the member states. This would allow the Commission to raise more debt itself. The advantage: The member states would no longer have to transfer money to the EU budget, but the EU Commission could still finance the reconstruction fund and increase its clout through a “lever”, ie the multiple use of a euro. The financial maneuver is to be secured via the EU budget.

Partial liability as a basis for negotiation

In contrast to corona bonds, i.e. common European debt securities, the Federal Government is more open to this proposal. From the federal government’s point of view, corona bonds are banned simply because they would be highly problematic under constitutional law.

That would be different with the EU proposal. In contrast to corona bonds, the federal government is not fully liable for European bonds that are secured by European institutions, but only in part.

The Federal Government emphasizes how important this is to it in a response to a request from the Greens for European common debts in previous bailout programs.

The issuance of bonds for the EFSM, the predecessor of today’s ESM rescue fund, “is strictly limited in fact and is based on legal acts with a corresponding contractual basis,” writes Finance Secretary of State Bettina Hagedorn (SPD) in the answer.

This would not be the case with corona bonds. The opposition is still putting pressure. “A large reconstruction fund for Europe is now necessary,” says Green budget politician Sven-Christian Kindler. “The Federal Government can no longer refuse to fund the fight against the corona crisis on the basis of solidarity.”

Scholz calls billions

Identical demands come from southern Europe. The Federal Government knows that it cannot oppose everything; the situation in Europe is too tense for that. However, she sees the risk of being legally vulnerable if the reconstruction fund is too large. Ministry of Finance officials and budget politicians also want to keep budgetary risks as low as possible.

Two letters from the Federal Ministry of Finance to the Budget Committee of the Bundestag, which are available to the Handelsblatt, show the burdens that the corona crisis is already having on the federal budget. With them, Federal Finance Minister Olaf Scholz (SPD) is calling new huge billions of dollars.

One day, Scholz wants to have 4.7 billion euros on hand to increase the guarantee volume of the European Investment Bank. He needs another ten billion euros to provide guarantees for KfW’s new fast loan. “The sums show that the risks to the federal budget are becoming more concrete,” says FDP housekeeper Otto Fricke. Another budget politician, who does not want to be named, says: “The government is clearly expecting guarantees to be drawn to this extent – and the money is gone with it.”

More: 16 countries, 16 ways out of the crisis – why Germany’s approach to the corona crisis seems arbitrary.

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Deutsch-Banker is preparing for higher credit risks

Frankfurt Stefan Hoops heads the corporate division of German bank. The part that is to form the core of the largest domestic money house according to the new strategy. At the same time, the corporate bank is also at the center of the corona crisis. Because of the massive distortions, Hoops fears that Europe’s banks will have to face higher risks in the lending business: “We will probably see more defaults than before,” warns the manager.

On the question of whether the bank can still meet its own targets, Hoops says: “If we have to adjust targets because of the corona crisis, we will communicate it accordingly”. Actually, CEO Christian Sewing had promised a black zero in operating profit for 2020 after a billion minus in the previous year.

However, analysts now expect the bank to face a loss of around two billion euros. Hoops sees additional burdens on the industry due to the fact that interest rates are even longer.

Nevertheless, the banker is optimistic that the pandemic will not trigger a banking crisis. “As long as the lockdown does not drag on unpredictably, I do not believe that European banks will face major problems,” emphasizes the 39-year-old.

Read the entire interview here:

Mr. Hoops, how are companies reacting to the corona crisis? Are everyone desperately looking for more liquidity?
The unrest was of course very noticeable for a while. At the beginning of the pandemic, when the scale was still difficult to estimate, many companies pulled their lines of credit as a precaution and tried to secure additional lines. Companies with good ratings also borrowed record amounts of funds on the bond market in the last week of March, partly to show that they can, partly preventively.

What does that mean for Deutsche Bank?
Our credit lines were used less than we would have thought possible in an extreme scenario. We also saw fewer draws in Europe than in the United States.

Deutsche Bank was caught by the corona crisis in the middle of implementing the new strategy. Does this strategy still fit?
It is now becoming apparent that our new strategy fits very well. Two fundamental decisions were particularly important: First, it helps us a lot now that we have concentrated all offers for corporate customers in one area. This business will certainly have the most shifts in market share in the coming quarters from which we want to benefit. It is also good that we have closed stock trading with institutional clients. The market leaders in this area have certainly earned very well in recent weeks thanks to the sharp price fluctuations. But the situation was more difficult for institutions that tend to be in the midfield – and we belonged to this category in institutional equity trading.

If we had to adjust targets because of the corona crisis, we would communicate it accordingly.

Deutsche Bank has set itself ambitious goals, especially for the corporate bank. Are these goals now waste?
If we have to adjust targets because of the corona crisis, we will communicate it accordingly. Regardless of this, we are currently concentrating on processing the flood of loan applications and helping our customers as quickly as possible. That is high on our list. In many cases it is very complex. Especially when you advise companies that are active in different currency areas and countries, since government aid programs are designed differently depending on the country.

What about the credit business?
We are seeing significantly more interest here. Not only for KfW loans, the demand has generally risen worldwide, also on the part of the corporations. In the past, banks gave loans to large corporations practically free of charge to get other, more lucrative businesses, such as payments or foreign exchange. The days of subsidized corporate loans seem to be over.

That would be positive for the banks, but interest rates will generally remain lower for a longer time, which will put pressure on margins. How will these opposing aspects impact overall?
The bottom line is that the negative interest rate effect will overlay the positive aspects. However, banks with more business in the dollar zone are likely to be hit harder than institutes with a focus on Europe. In the euro zone, the industry has long had to deal with how to earn something in a negative interest rate environment. Dollar-heavy banks first have to think into such a scenario. Many businesses that still paid off with a two percent risk-free interest rate will no longer pay off.

Does Corona also change Deutsche Bank’s pricing policy with regard to custody fees for corporate customers’ deposits?
Basically, we stay with our line. We pass the interest on to corporations and large corporate customers, but we do grant allowances. We engage in intensive discussions with our customers and look at the entire relationship – the corona crisis naturally also plays an important role in this. In the end, the amount of the allowances also depends on the scope of the overall customer relationship.

The banks have long struggled to lend to German companies. Now companies that do not have a house bank at their side are skidding. Why isn’t the interest of banks in new customers growing?
In order to obtain loans from the KfW state development bank, companies need a house bank. If a customer is not yet in the system, we first have to subject him to a credit and identity check. This is not a quick process, and even now the banking regulator does not allow us to be careless. In view of the high demand, most employees have their hands full serving the existing customers. Fortunately, we have succeeded very well so far. In such an environment, it is of course difficult to squeeze out resources to get new customers on board.

What about customers who were previously only occasional customers?
After that we do not differentiate. If a customer has gone through the system and through the credit and identity check with us, we are there for them. Ultimately, it’s about a resource issue. We are a house bank for a significant number of companies, but have so far not granted any loans to these customers. Even in such cases, the credit check does not work overnight. It may be that the KfW rapid loan brings relief because it only requires a simplified check.

Was it really necessary for the taxpayer to be 100 percent liable for these loans?
In our view, yes – in the interest of the overall economy. Anything else would slow down the process considerably.

Why?
We have around 1.1 million corporate customers in Germany with sales of between EUR 250,000 and EUR 50 million, which are generally eligible for a quick loan. A significant number of these companies have no credit history, and a regular review would take too long. In the case of fast loans, the government has clearly specified which parameters we need to check and which not. This makes it much easier for banks to grant a loan right away. This gives companies valuable time that they urgently need right now.

Is that the only advantage?
This is a big advantage in this situation. Because some customers come from difficult industries in which the turnover has dropped 100 percent overnight, such as hotels or coach companies. This raises the question for all banks of how big the creditworthiness of such customers is at the moment. And there are cases in which – depending on the further course of the corona crisis – the question will arise in the medium term whether companies can survive without additional equity. Normal bank loans, but also the usual KfW loans reach their limits. The KfW rapid loan does not require collateral, which can be helpful in such borderline cases.

Some U.S. banks have already released their first quarter results. Most of them significantly increase loan loss provisions. Will that also happen in Germany?
You have to look at it differently, and there are significant differences. German and European banks, for example, are not so heavily involved in the credit card business – but it is precisely here that American banks are now recording high provisions. There are basically four components that have a major impact on risk provisioning: large individual defaults, many small defaults, or a trend towards poorer credit ratings, which forces banks to put more capital into credit. There are also accounting details because banks also have to provide more equity for loans if interest and principal are deferred.

How big will the overall effect be?
The extensive aid programs of many European countries, especially for smaller companies, will make a significant contribution to ensuring that many companies do not get into serious difficulties in the first place. Short-time work also helps to keep unemployment from skyrocketing like it is in the United States. We are likely to see more failures than before. If only because there have been hardly any failures in the past ten years.

How dangerous is development? Do we have to fear a banking crisis after the corona crisis?
As long as the lockdown doesn’t go on forever, I don’t think European banks are going to have any big problems. European companies will probably be able to deal with this scenario, especially since government measures help to stabilize the situation.

Let us take a look into the future. What could the long-term economic consequences of the corona crisis look like?
In terms of healthcare, Germany seems to be steering through the crisis better than other countries. It is definitely good for people. It was also very important that the German government provided aid very quickly and extensively. That helps all industries. However, we have the disadvantage that the German economy has a strong international focus. When world trade shrinks, it is bad for domestic companies. Some industries will also have to adjust to customer behavior changes.

Which industries do you have in mind?
I believe that people will save more in the future. This will also consume less, with staples still on the shopping list. For example, the middle price segment could have problems. Ordinary earners will consider whether they really need the expensive new TV or would rather wait a bit. Online trade could also gain in importance, at the expense of shopping centers and shops in the city centers.

What about the mobility industry? Will you still go on business trips as often as before?
I will definitely continue to fly to Asia or the USA. With a view to the time difference alone, such trips cannot be completely replaced by video conferencing. But short-distance business trips will be much less common, and people will also be more concerned about vacation trips than before. This has an impact on traffic and tourism. But there will also be relative winners in industries that are shrinking overall.

And how will the corona crisis change your industry?
Certain trends will accelerate significantly, everything that has to do with digitization, online payment processes or the support of e-commerce, for example. In addition, many companies will finance themselves in a completely different way in the future than they do today. We can very well imagine that companies are moving more towards buying machines instead of buying them. This would make it easier to cushion production losses, which would of course be an enormous advantage in the current situation.

What about other megatrends? Are topics like sustainability permanently pushed into the background by the pandemic?
Many in our industry share this concern. At the beginning of this year, I assumed that the topic of sustainability 2020 would occupy me intensively. Now I’m afraid that the whole complex is no longer getting the attention it still deserves. That would be bad collateral damage to the pandemic. However, I firmly believe that this pandemic will also make us think more about the future of our planet. So the topic will climb up on the agenda again.

We almost landed close to the best case scenario.

Corona is slowing globalization. Isn’t that also a clear disadvantage for Deutsche Bank, which not least advertises with its internationality?
If world trade shrinks, banking services based on that trade will suffer, that’s the nature of it. If the cake gets smaller overall, our goal must be to get a bigger piece of it. The feedback from our customers, especially in these weeks, shows me that we are perceived as a reliable and robust partner in the crisis – and that makes me confident.

How do you work as a global bank from your home office? Errors or failures are often even more critical in banking than in other industries.
It works amazingly well. When we intensified preparations for working from home six or seven weeks ago, we developed various scenarios – and we almost ended up close to the best-case scenario. This is mainly due to our IT and operations departments, which do a great job. Around two thirds of the entire workforce of Deutsche Bank currently work from home, and that very efficiently. So we will also think about how we will organize our work in the future.

Perhaps it helps that Deutsche Bank has already weathered one or two of the crises in recent years?
It is certainly true that we have learned to work together particularly effectively in past crises. And we’ve certainly developed a very careful view of what can go wrong over the years. For example, we have always been very careful about IT and processes, but now we have been able to help customers who have had technical problems.

What is the most important lesson from the corona crisis for you as a banker?
That the role of customer advisors has become significantly more important than that of product and process experts. It is about understanding exactly how a company really works, what effects the corona crisis has on the individual areas of a company and what the owners or managers need most at the moment. This is also a nice confirmation for our colleagues who have been at their customers’ side for years. We are currently experiencing tailwind.

And as a father in the home office?
Perhaps we have underestimated the role of the teachers who teach our children every day.

Mr. Hoops, thank you for the interview.

More: Why banks should see the crisis as an opportunity.

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Deutsche Bank is preparing for higher credit risks

Frankfurt Stefan Hoops heads the corporate division of German bank. The part that is to form the core of the largest domestic money house according to the new strategy. At the same time, the corporate bank is also at the center of the corona crisis. Because of the massive distortions, Hoops fears that Europe’s banks will have to face higher risks in the lending business: “We will probably see more defaults than before,” warns the manager.

On the question of whether the bank can still meet its own targets, Hoops says: “If we have to adjust targets because of the corona crisis, we will communicate it accordingly.” Actually, CEO Christian Sewing had a profit in 2020 for one billion euros last year promised a black zero.

However, analysts now expect the bank to face a loss of around two billion euros. Hoops sees additional burdens on the industry due to the fact that interest rates are even longer.

Nevertheless, the banker is optimistic that the pandemic will not trigger a banking crisis. “As long as the lockdown does not drag on unpredictably, I do not believe that European banks will face major problems,” emphasizes the 40-year-old.

Read the entire interview here:

Mr. Hoops, how are companies reacting to the corona crisis? Are everyone desperately looking for more liquidity?
The unrest was of course very noticeable for a while. At the beginning of the pandemic, when the scale was still difficult to estimate, many companies pulled their lines of credit as a precaution and tried to secure additional lines. Companies with good ratings also borrowed record amounts of funds on the bond market in the last week of March, partly to show that they can, partly preventively.

What does that mean for Deutsche Bank?
Our credit lines were used less than we would have thought possible in an extreme scenario. We also saw fewer draws in Europe than in the United States.

Deutsche Bank was caught by the corona crisis in the middle of implementing the new strategy. Does this strategy still fit?
It is now becoming apparent that our new strategy fits very well. Two fundamental decisions were particularly important: First, it helps us a lot now that we have concentrated all offers for corporate customers in one area. This business will certainly have the most shifts in market share in the coming quarters from which we want to benefit. It is also good that we have closed stock trading with institutional clients. The market leaders in this area have certainly earned very well in recent weeks thanks to the sharp price fluctuations. But the situation was more difficult for institutions that tend to be in the midfield – and we belonged to this category in institutional equity trading.

If we had to adjust targets because of the corona crisis, we would communicate it accordingly.

Deutsche Bank has set itself ambitious goals, especially for the corporate bank. Are these goals now waste?
If we have to adjust targets because of the corona crisis, we will communicate it accordingly. Regardless of this, we are currently concentrating on processing the flood of loan applications and helping our customers as quickly as possible. That is high on our list. In many cases it is very complex. Especially when you advise companies that are active in different currency areas and countries, since government aid programs are designed differently depending on the country.

What about the credit business?
We are seeing significantly more interest here. Not only for KfW loans, the demand has generally risen worldwide, also on the part of the corporations. In the past, banks gave loans to large corporations practically free of charge to get other, more lucrative businesses, such as payments or foreign exchange. The days of subsidized corporate loans seem to be over.

That would be positive for the banks, but interest rates will generally remain lower for a longer time, which will put pressure on margins. How will these opposing aspects impact overall?
The bottom line is that the negative interest rate effect will overlay the positive aspects. However, banks with more business in the dollar zone are likely to be hit harder than institutes with a focus on Europe. In the euro zone, the industry has long had to deal with how to earn something in a negative interest rate environment. Dollar-heavy banks first have to think into such a scenario. Many businesses that still paid off with a two percent risk-free interest rate will no longer pay off.

Does Corona also change Deutsche Bank’s pricing policy with regard to custody fees for corporate customers’ deposits?
Basically, we stay with our line. We pass the interest on to corporations and large corporate customers, but we do grant allowances. We engage in intensive discussions with our customers and look at the entire relationship – the corona crisis naturally also plays an important role in this. In the end, the amount of the allowances also depends on the scope of the overall customer relationship.

The banks have long struggled to lend to German companies. Now companies that do not have a house bank at their side are skidding. Why isn’t the interest of banks in new customers growing?
In order to obtain loans from the KfW state development bank, companies need a house bank. If a customer is not yet in the system, we first have to subject him to a credit and identity check. This is not a quick process, and even now the banking regulator does not allow us to be careless. In view of the high demand, most employees have their hands full serving the existing customers. Fortunately, we have succeeded very well so far. In such an environment, it is of course difficult to squeeze out resources to get new customers on board.

What about customers who were previously only occasional customers?
After that we do not differentiate. If a customer has gone through the system and through the credit and identity check with us, we are there for them. Ultimately, it’s about a resource issue. We are a house bank for a significant number of companies, but have so far not granted any loans to these customers. Even in such cases, the credit check does not work overnight. It may be that the KfW rapid loan brings relief because it only requires a simplified check.

Was it really necessary for the taxpayer to be 100 percent liable for these loans?
In our view, yes – in the interest of the overall economy. Anything else would slow down the process considerably.

Why?
We have around 1.1 million corporate customers in Germany with sales of between EUR 250,000 and EUR 50 million, which are generally eligible for a quick loan. A significant number of these companies have no credit history, and a regular review would take too long. In the case of fast loans, the government has clearly specified which parameters we need to check and which not. This makes it much easier for banks to grant a loan right away. This gives companies valuable time that they urgently need right now.

Is that the only advantage?
This is a big advantage in this situation. Because some customers come from difficult industries in which the turnover has dropped 100 percent overnight, such as hotels or coach companies. This raises the question for all banks of how big the creditworthiness of such customers is at the moment. And there are cases in which – depending on the further course of the corona crisis – the question will arise in the medium term whether companies can survive without additional equity. Normal bank loans, but also the usual KfW loans reach their limits. The KfW rapid loan does not require collateral, which can be helpful in such borderline cases.

Some U.S. banks have already released their first quarter results. Most of them significantly increase loan loss provisions. Will that also happen in Germany?
You have to look at it differently, and there are significant differences. German and European banks, for example, are not so heavily involved in the credit card business – but it is precisely here that American banks are now recording high provisions. There are basically four components that have a major impact on risk provisioning: large individual defaults, many small defaults, or a trend towards poorer credit ratings, which forces banks to put more capital into credit. There are also accounting details because banks also have to provide more equity for loans if interest and principal are deferred.

How big will the overall effect be?
The extensive aid programs of many European countries, especially for smaller companies, will make a significant contribution to ensuring that many companies do not get into serious difficulties in the first place. Short-time work also helps to keep unemployment from skyrocketing like it is in the United States. We are likely to see more failures than before. If only because there have been hardly any failures in the past ten years.

How dangerous is development? Do we have to fear a banking crisis after the corona crisis?
As long as the lockdown doesn’t go on forever, I don’t think European banks are going to have any big problems. European companies will probably be able to deal with this scenario, especially since government measures help to stabilize the situation.

Let us take a look into the future. What could the long-term economic consequences of the corona crisis look like?
In terms of healthcare, Germany seems to be steering through the crisis better than other countries. It is definitely good for people. It was also very important that the German government provided aid very quickly and extensively. That helps all industries. However, we have the disadvantage that the German economy has a strong international focus. When world trade shrinks, it is bad for domestic companies. Some industries will also have to adjust to customer behavior changes.

Which industries do you have in mind?
I believe that people will save more in the future. This will also consume less, with staples still on the shopping list. For example, the middle price segment could have problems. Ordinary earners will consider whether they really need the expensive new TV or would rather wait a bit. Online trade could also gain in importance, at the expense of shopping centers and shops in the city centers.

What about the mobility industry? Will you still go on business trips as often as before?
I will definitely continue to fly to Asia or the USA. With a view to the time difference alone, such trips cannot be completely replaced by video conferencing. But short-distance business trips will be much less common, and people will also be more concerned about vacation trips than before. This has an impact on traffic and tourism. But there will also be relative winners in industries that are shrinking overall.

And how will the corona crisis change your industry?
Certain trends will accelerate significantly, everything that has to do with digitization, online payment processes or the support of e-commerce, for example. In addition, many companies will finance themselves in a completely different way in the future than they do today. We can very well imagine that companies are moving more towards buying machines instead of buying them. This would make it easier to cushion production losses, which would of course be an enormous advantage in the current situation.

What about other megatrends? Are topics like sustainability permanently pushed into the background by the pandemic?
Many in our industry share this concern. At the beginning of this year, I assumed that the topic of sustainability 2020 would occupy me intensively. Now I’m afraid that the whole complex is no longer getting the attention it still deserves. That would be bad collateral damage to the pandemic. However, I firmly believe that this pandemic will also make us think more about the future of our planet. So the topic will climb up on the agenda again.

We almost landed close to the best case scenario.

Corona is slowing globalization. Isn’t that also a clear disadvantage for Deutsche Bank, which not least advertises with its internationality?
If world trade shrinks, banking services based on that trade will suffer, that’s the nature of it. If the cake gets smaller overall, our goal must be to get a bigger piece of it. The feedback from our customers, especially in these weeks, shows me that we are perceived as a reliable and robust partner in the crisis – and that makes me confident.

How do you work as a global bank from your home office? Errors or failures are often even more critical in banking than in other industries.
It works amazingly well. When we intensified preparations for working from home six or seven weeks ago, we developed various scenarios – and we almost ended up close to the best-case scenario. This is mainly due to our IT and operations departments, which do a great job. Around two thirds of the entire workforce of Deutsche Bank currently work from home, and that very efficiently. So we will also think about how we will organize our work in the future.

Perhaps it helps that Deutsche Bank has already weathered one or two of the crises in recent years?
It is certainly true that we have learned to work together particularly effectively in past crises. And we’ve certainly developed a very careful view of what can go wrong over the years. For example, we have always been very careful about IT and processes, but now we have been able to help customers who have had technical problems.

What is the most important lesson from the corona crisis for you as a banker?
That the role of customer advisors has become significantly more important than that of product and process experts. It is about understanding exactly how a company really works, what effects the corona crisis has on the individual areas of a company and what the owners or managers need most at the moment. This is also a nice confirmation for our colleagues who have been at their customers’ side for years. We are currently experiencing tailwind.

And as a father in the home office?
Perhaps we have underestimated the role of the teachers who teach our children every day.

Mr. Hoops, thank you for the interview.

More: Why banks should see the crisis as an opportunity.

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In the corona crisis, trading is a blessing for Deutsche Bank

Christian Sewing

Analysts fear that the corona crisis will spoil the Deutsche Bank boss’s profit targets.


(Photo: Reuters)

Frankfurt The promise is still there: Christian Sewing actually wants to deliver a small operating profit this year. He put a “black zero” Deutsche Bank boss prospects for investors for 2020 – but that was long before the outbreak of the corona crisis.

According to analysts, this goal has long been a waste. On average, the experts expect a loss before taxes of EUR 1.9 billion for 2020, according to a compilation that the bank has published on its website. The net forecasted minus amounts to over two billion euros.

On April 29, investors will get the first important clues as to how bad 2020 will really be for Deutsche Bank. Then the largest domestic bank presents its first quarter results, usually the strongest in banking. On average, analysts anticipate a comparatively small loss of EUR 35 million for the first three months of this year. However, the experts predict a net loss of 437 million euros. For comparison: In the previous year, the bank still had a bottom line profit of 97 million euros.

The quarterly figures of the large US banks have shown how painful the consequences of the crisis can be. For industry leader JP Morgan, earnings fell in the first three months compared to the previous year by around two thirds to at least $ 2.9 billion. The main reason for the slump was the drastically higher provision for impending credit losses. $ 6.8 billion JP Morgan for that back. With the competitor Wells Fargo there were still 3.2 billion.

Opportunities from the crisis

“Because of the poor profitability, the major German banks cannot afford provisions of this size,” warns a top banker. But that may not be necessary. Stefan Hoops, head of corporate business at Deutsche Bank, hopes that Europe’s banks will come through the corona crisis without major injuries. He also blames structural differences between the United States and Europe for this.

For example, European financial institutions are much less involved in the credit card business, which creates high provisions at the US institutions. For Hoops area, the analysts predict a pre-tax profit of 195 million euros for the first quarter. For the retail customer bank, the earnings forecast is 117 million euros and for asset management 125 million euros.

The area that Sewing cut back significantly in the course of the new strategy has proven to be an opportunity for Deutsche Bank: trading, because the dramatic price fluctuations ensure brisk operation in the trading rooms. As part of the new strategy, Deutsche Bank has largely stepped out of its equity business with large customers.

However, the bank is still one of the market leaders in the business of bonds, foreign exchange and derivatives, their traditional strength. Business with the major investment banks has recently been excellent, especially in currencies. In the Citigroup bond, currency and commodity trading revenues rose 39 percent in the first quarter Goldman Sachs by 33 percent. But there has also been a real boom in the placement of corporate bonds in recent weeks.

In retail, the analysts expect revenues of 1.6 billion euros for the first quarter. For the entire investment bank, the experts expect revenues of 1.9 billion euros and a profit before taxes of 225 million euros after 247 million in the previous year. The investment bank is expected to make the largest contribution to Deutsche Bank’s profit – and to become a stabilizing anchor in the pandemic.

More: In the corona crisis, the KfW boss becomes Germany’s most important banker

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Allegedly large tax relief planned for companies

Closed shop space

The economy should be kept running with tax relief.


(Photo: dpa)

Dusseldorf The federal and state governments are planning significant tax relief for companies due to the corona crisis. The economy could be relieved of current past losses by 15 billion euros just by changing the way past profits were offset. This is reported by the “Spiegel” on Friday evening.

The tax department heads of the federal and state finance ministries are currently advising on the generous expansion of the possibilities with which companies can offset current losses with past profits. It is conceivable to extend the so-called loss carry-back to the past five years. So far, it only applies to the previous year.

It is also under discussion to raise the amount previously capped at one million euros. So that the companies do not have to wait for the tax return next year, they should already be able to claim part of their profits from the previous year as a loss. There is a 20 percent stake in the room, which they could use to claim tax refunds from the tax offices, writes the “Spiegel”.

According to the report, the department head group is also considering postponing the payment of income tax by one month. The potential for more liquidity here would be another 20 billion euros. Sales tax payments could also be deferred, which could mean a deferral of payments totaling up to 25 billion euros. However, the payments are not waived.

The measures aim to avoid short-term liquidity bottlenecks at companies. Sooner or later the tax effects would be reflected in the state budget anyway.

The majority of companies in Germany suffer from drop in sales and production losses due to the shutdown. The global supply chains are also currently under great pressure. According to a survey available to the Handelsblatt newspaper, every second medium-sized company (51 percent) is on the verge of an economic shutdown should continue for another four weeks. More than three quarters of companies and the self-employed (76 percent) indicated that government aid paid so far was not sufficient to meet their financial needs.

Even large corporations like Adidas had recently drawn on KfW credit lines. On Friday, the Karstadt Galeria Kaufhof department store group filed a lawsuit to open its branches in order to avoid financial loss. The federal and state governments had also presented a plan on Wednesday to cautiously relax the current measures.

More: The IMF expects the worst economic crisis since the Great Depression in 1929.

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