How many loans can we take?
Banks in Germany are earning less and less money and are trying to compensate this by granting more loans – in particular to private individuals. Now the EU is planning to reduce the duration of a private bankruptcy to three years. This can be seen as another invitation to incur debts. What if the bubble bursts…?
The Ostsächsische Sparkasse Dresden (OSD) is a bank among many in Germany. With approximately 600,000 customers and a balance sheet total of 12 billion euros, it is pretty average. What does the OSD also have in common with many other banks in Germany (and throughout Europe)? It fights low interest rates by diving into the credit business – and with considerable success. The Sparkasse’s loan portfolio amounted to 6.63 billion euros in the past financial year (2017: 6.12 billion euros). In 2018 alone, new loans worth 1.55 billion euros were added, 15.1 percent more than in the previous year.
The credit business is booming
In particular, brokering to private individuals has increased significantly among banks in recent years, with real estate loans accounting for the largest share. According to Bundesbank statistics, at the end of 2018 the total amount of personal loans in Germany was just under EUR 1.23 trillion – this corresponds to an increase of more than EUR 200 billion since the outbreak of the financial crisis. The volume of loans granted to companies and the self-employed has also risen significantly. Here, however, the increase is «only» just under 150 billion euros.
But in the current low-interest environment, do banks have any choice but to spend more and more credit? As the renowned bank newsletter finanz-szene.de reported at the beginning of April, the interest margins of German banks on real estate and corporate loans have fallen drastically over the past five years. Margins have risen only in three quarters, while they have fallen by up to 25 percent in all other quarters. Because they earn less and less through the interest rate mains, the banks have to compensate for this by giving out more loans.
The German financial supervisory authorities are already concerned about lending: Raimund Röseler, Bafin’s chief financial supervisor, even warns that a possible erosion of lending standards in conjunction with reduced risk provisioning could pose a threat to financial stability. Germany can indeed look back on an economically successful decade, in which the ratio of defaulted loans had also fallen significantly. Nobody knows exactly how Germany’s economic strength will be in the future. The German Chamber of Industry and Commerce (DIHK) expects only 0.6 percent growth this year. In 2018 it was still 1.4 percent.
Getting a new loan has never been cheaper for consumers and entrepreneurs than it is today – not only through their own bank. Comparison sites like finanzcheck.de make it easier than ever to assess loans and even conclude them directly online. And there is no need to worry if a loan cannot be repaid: The EU is currently planning to reduce the duration of a private insolvency from five to three years. But it is to be feared that such a turbo-insolvency will create false incentives for consumers in particular. At least that is what the German debt collection industry suspects. Nevertheless, the EU wants to introduce the new directive, which is currently passing through the relevant bodies, throughout Europe in the near future.
The credit paradise has its downsides
What sounds like a paradise on earth, especially for private individuals, also has its downsides. In the meantime, a dangerous credit bubble has built up in Germany and throughout Europe, which threatens to burst even with minimal market changes. In the corporate sector in particular, countless so-called zombie companies are now operating. These companies have long since ceased to operate economically, but thanks to extremely favourable financing options they are still hesitating to avoid the inevitable bankruptcy.
Also, fewer and fewer private individuals in Germany are forced into insolvency. Last year there were a total of only 88,885 people – fewer than at any time in almost 15 years. Here, too, the following applies far too often: if the individual has difficulties, another loan will certainly help. The banks have to get their money into the people’s pockets. Otherwise there is even the threat of penalty interest. This is because the Bundesbank currently charges deposits of German financial institutions a negative interest rate of 0.4 percent. The Ostsächsische Sparkasse Dresden, for example, paid about 700,000 euros in penalty interest to the German state bank in 2018.
But what happens if the bubble bursts, triggered by a deep recession or further increases in property and rental prices? The fact is that wage increases have been lagging behind rent and purchase price increases for years. Then there will be a wave of insolvencies – both on the corporate side and in the private sector. Receivables will no longer be serviced, which will drag more companies and consumers into the abyss. The real estate market collapses, the foreclosure auctions generate lower selling prices and the banks have to post deficits again. I hope the European economy is better prepared for such a scenario.