Financial stability implications of COVID-19 support measures
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ECB-Public
Financial stability implications
of COVID-19 support measures
SUERF E-workshop in
cooperation with KfW:
COVID-19 and government firm
rescue measures: best practices,
current challenges, and the way
forward post-corona
3 March 2021 Tuomas Peltonen
European Systemic Risk Board - Deputy Head of Secretariat
www.ecb.europa.eu ©
Key findings
1. To support the real economy during the COVID-19 pandemic, governments have
provided swift and unprecedented support packages.
− This has provided crucial relief to households and non-financial corporations.
− The financial system has continued to provide funding to the real economy, and loan
losses have remained limited.
− At the current juncture, credit markets are strongly supported by fiscal policy.
2. The longer the crisis lasts and the weaker the economic recovery will be, losses to
the non-financial sector could spill over to financial sector balance sheets.
− Deleveraging of banks might lead to adverse feedback loops.
− Cross-border banking activities might be particularly affected by deleveraging.
− There are trade-offs between supporting the economy and maintaining support for too
long.
2 www.ecb.europa.eu ©
The COVID-19 crisis has brought about a significant economic shock
• In comparison to previous crises, the expected cumulative output loss caused by the COVID-
19 pandemic is significant (loss of around 10% of EU GDP).
• Faster recovery than during GFC and Asian crisis expected. The Q4 2019 level is expected to
be reached by Spring 2022. Estimation of GDP losses for the COVID-19
Quarterly output loss of the COVID-19 pandemic and comparison with and other past crises (%)
other major crises (index, last period before recession = 100) GDP loss
Fiscal costs, net (Laeven and Valencia, 2018)
COVID-19 Russia (2008)
Global financial crisis (2008-2010) UK (1974) 25%
Asian crisis (1997) Mexico (1994)
Pre COVID
20%
130
125
15%
120 Area between dark blue and
115 grey lines (100) = 1.3 tn EUR
10%
110
105 5%
100
95 0%
COVID- Global Mexico UK (oil Asian Russia
90 19 financial (1994) crisis) crisis (2008)
85
crisis (1997)
(2008)
80 Source: Eurostat, European Commission, Haver Analytics, ESRB, Laeven and Valencia (2018) and
t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12 ESRB Secretariat calculations.
Source: Eurostat, European Commission, Haver Analytics and ESRB Secretariat calculations. Note: GDP loss computed as the accumulated sum of the differences between quarterly GDP in the
Notes: the blue line represents q-o-q real GDP growth in the EU until Q4-2020 (t+4) and then the Winter Economic Forecast by the European 12 quarters of a crisis and GDP of the quarter immediately before the crisis, as a percentage of four-
Commission. Pre-COVID represents the estimated real GDP growth path in December 2019, according o the projections by the European Commission periods accumulated GDP at the onset of the crisis. Net fiscal costs, as reported by Laeven and
(growth for the last four quarters is forecasted to be constant at 0.3%). Global financial crisis refers to the EU real GDP growth path. The Asian crisis is Valencia (2018) are expected to be an approximation to the support received by the economy. The
computed as the average of Indonesia, Japan, South Korea, Malaysia, Philippines and Thailand. Real GDP growth for other crisis and countries is Asian crisis is computed as the average of Indonesia, Japan, South Korea, Malaysia, Philippines and
calculated in national currencies to avoid distortions by exchange rates. Thailand. No data on fiscal costs is available for the UK economy during the oil crisis and the EU
during the global financial crisis is the average of the net fiscal costs incurred by EU countries
(excluding UK).
. 3 www.ecb.europa.eu ©Recovery prospects vary significantly across EU Member States
• Italy and Spain are forecast to reach the pre-crisis real GDP level only in 2023.
• The heterogeneity of growth prospects is also reflected in the expected growth in the number of
insolvencies, albeit the relationship is weaker or even non-existent in some countries.
GDP forecasts for a selection of global economies Insolvency forecasts for 2020 and 2021
(Index: 2019 Q4 = 0) (Percentage change over same period in previous year)
2020 forecast
2021 forecast
Cumulative change 2020-2021
120
100
80
60
40
20
0
-20
CZ
NL
RO
HU
DE
FI
FR
EU*
IE
GR
IT
EE
PT
SK
ES
BE
PL
BG
AT
SE
LT
LV
LU
Source: Euler Hermes and Allianz Research. Notes: Forecast for DE, FR, ES, IT
and NL based on a revised version of the Euler Hermes and Allianz Research
report dated 24 September, other countries based on previous report dated 16
Source: EC Winter 2021 forecast and ESRB Secretariat calculations.
July. EU* refers to GDP-weighted sample of countries shown in the chart.
Notes: No GDP quarterly forecasts are reported for CY, EL, MT and
LU.
4 www.ecb.europa.eu ©Policy support has so far prevented mass corporate insolvencies
• Bankruptcies in the EU have so far decreased compared to the seasonally adjusted level.
• Banks’ provisions for IFRS stage 2 loans are highly heterogeneous across countries and –
contrary to expectations – not strongly driven by the country-specific size of the COVID-19
shock.
Declarations of bankruptcies in the EU, 2015-2020 Forecast GDP growth 2020-21 (x-axis, %) and change of
provisions for stage 2 loans (y-axis, percentage points)
0.7 p.p.
HU IE 0.6 p.p.
BG
0.5 p.p.
RO
0.4 p.p.
EBA 2018 R² = 0.0573
HR
BE 0.3 p.p.
PT CZ SK
AT
PL 0.2 p.p.
NL DK
CY SI EE 0.1 p.p.
FI LT
GR FR LU 0.0 p.p.
ES IT MT SE
LV
DE
-0.1 p.p.
-8% -6% -4% -2% 0% 2% 4% 6% 8%
Source: EBA Risk Dashboard, EC Winter Forecast and ESRB Secretariat calculations.
Source: Eurostat (2021)
Notes: Dots represent the change in provisions for stage 2 loans (share of stage 2 loans multiplied by
coverage) as reported in the EBA Risk Dashboard, between Q4 2019 and Q3 2020. EBA 2018 refers to
the adverse stress test scenario. Cumulative GDP growth in 2020 and 2021 in the 2021 EC Winter
Forecast.
5 www.ecb.europa.eu ©Fiscal support has been broad and swift, with differences in types of programs
and uptake across country
• Liquidity measures such as moratoria and public guarantees
until September 2020 were more important than solvency measures.
• Despite significant heterogeneity, countries hit harder have bigger programs and larger
uptake Total Total size
Total
uptake
Total size
announced
Uptake all measures
uptake announced Size all measures
(bn EUR) (bn EUR)
(% GDP (% GDP 2019) (y-axis: size or uptake in percentage of GDP; x-axis: QoQ GDP growth rate)
2019) 35%
Moratoria 838 5.0%
30%
Public
435 1,580 2.6% 9.5%
guarantees
Public loans 66 57 0.4% 0.3% 25%
Direct grants 112 327 0.7% 2.0%
20%
Tax
77 170 0.5% 1.0%
deferrals
15%
Tax reliefs 13 75 0.1% 0.4%
Public
support for 10%
n.a. 227 n.a. 1.4%
credit
insurance
5%
Total 1,541 9.2%
Total w/o 0%
704 2,436 4.2% 14.6%
moratoria -20% -15% -10% -5% 0% 5% 10%
Source: Recommendation ESRB/2020/08 (refer. date 30 Sep 2020), ECB (MNA, BSI, CBD). Source: Recommendation ESRB/2020/08 by 31 October 2020 (reference date 30 Sep 2020), ECB (MNA)
Note: Total size announced refers to field 1.1.01, and Total Uptake to field 2.2.10 for all Note: Announced size (field 1.1.01) and uptake (field 2.2.10) for all measures combined as a share of 2019 GDP on the y-axis.
measure apart from tax reliefs and tax deferrals, where field 2.2.12 was used. Reporting data Quarter-on-quarter GDP growth from Q1 2020 to Q2 2020 on the x-axis. Based on 28 countries (IS, LI and NO are excluded).
gaps exist – results should be interpreted with caution.
6 www.ecb.europa.eu ©While moratoria serve both NFCs and households, public guarantees are
mostly extended to NFCs.
• The share of loans under moratoria to total loans for most countries is higher for NFCs than
for HHs and strong for SMEs.
• Public guarantees had an uneven impact across European countries and banks. Most of the
support is extended to NFCs.
(% of total loans and advances to the household and NFC sector, respectively) (% of total loans and advances to the household and NFC sector, respectively)
Source: EBA, ESRB calculations (reference date June 2020). Source: EBA, ESRB calculations (reference date June 2020).
Note: Countries are sorted according to the share of loans under moratoria in total loans and advances Note: Countries are sorted according to the share of loans under moratoria in total loans and advances
to households and NFCs. The values correspond to the mean value for banks in the given country. to households and NFCs. The values correspond to the mean value for banks in the given country. CY
Values for CY – 45% for HHs, 53% for SMEs and 17% for Other NFCs are not shown for presentational – 45% for HHs, 53% for SMEs and 17% for Other NFCs – left out for presentational reasons.
reasons.
7 www.ecb.europa.eu ©More vulnerable sectors and countries have benefitted from the support
measures, but face a higher risk of an early withdrawal of support
• Countries with high employment in vulnerable sectors rely more on direct grants.
• The uptake of moratoria is positively correlated with pre-crisis debt levels.
(Direct grants) (Direct grants)
(Moratoria) (Moratoria)
Size direct grants (y-axis) and employement in 8% 8%
Less vulnerable vulnerable sectors (x-axis)
More vulnerable 4.0%
7% 7%
3.5%
3.5%
6% 6%
3.0%
3.0%
5% 5%
2.5% 2.5%
4% 4%
2.0% 2.0%
3% 3%
1.5% 1.5%
2% 2%
1.0%
1.0%
1% 1%
0.5%
0.5% 0% 0%
Low household debt High household Low NFC debt High NFC debt
0.0%
20% 25% 30% 35% debt
0.0%
Source: Recommendation ESRB/2020/08 by 31 October 2020 (reference date 30 Sep 2020), ECB (MNA) Source: Recommendation ESRB/2020/08 by 31 October 2020 (reference date 30 Sep 2020), ECB (MNA)
Note: Announced size (field 1.1.01) as a share of 2019 GDP on the y-axis for the three graphs. Vulnerability is defined as the Note: Uptake (field 2.2.20) of moratoria, public guarantees and loans as a share of 2019 GDP on the y-axis. Median over
share of employment in the NACE sectors G, H, I R, T, U in Q4 2019. The bar plots depict the median over the lowest (highest) countries in the lowest (highest) quartile of household ("HH") or NFC debt over GDP in Q4 2019 as "low debt" ("high debt") on
quartile of the vulnerability metric as "less vulnerable" ("more vulnerable"). The scatterplot compares the announced size of the x-axis. All graphs based on 28 countries (IS, LI and NO are excluded).
direct grants (as a share of 2019 GDP; y-axis) to the vulnerability metric (a higher share means higher vulnerability; x-axis). All
graphs based on 28 countries (IS, LI and NO are excluded).
8 www.ecb.europa.eu ©Following the surge in Q2, lending to the private sector decelerated in H2 2020
• The outstanding stock of NFC loans has been broadly stable in H2.
• Mortgage lending to HH continued to gradually accelerate in the course of 2020, while consumer
lending collapsed – in line with the propensity to increase precautionary savings.
Outstanding loans to NFCs Outstanding loans households
(growth rate and stock) (growth rate and stock)
NFC loans (outstanding stock, lhs)
NFC loans (y-o-y growth, rhs) 5.5 7%
Consumer loans
5.0 6% (outstanding stock, lhs)
4.4 7%
House purchases
4.5 5% (outstanding stock, lhs)
4.3 6% Other (outstanding stock,
4.0 4% lhs)
Consumer loans (y-o-y
Trillions of euros
4.2 5% 3.5 3% growth, rhs)
Trillions of euros
House purchases (y-o-y
3.0 2% growth, rhs)
4.1 4%
Other (y-o-y growth, rhs)
2.5 1%
4.0 3% 2.0 0%
1.5 -1%
3.9 2%
1.0 -2%
3.8 1%
0.5 -3%
3.7 0% 0.0 -4%
Mar-18
Mar-19
Mar-20
Jan-18
Jan-19
Jan-20
May-18
May-19
May-20
Jul-18
Sep-18
Nov-18
Jul-19
Sep-19
Nov-19
Jul-20
Sep-20
Nov-20
Mar-18
Mar-19
Mar-20
Jan-18
Jan-19
Jan-20
May-18
May-19
May-20
Jul-18
Sep-18
Nov-18
Jul-19
Sep-19
Nov-19
Jul-20
Sep-20
Nov-20
Source: ECB Balance Sheet Items and ESRB Secretariat calculations. Source: ECB Balance Sheet Items and ESRB Secretariat calculations.
Notes: Euro area aggregates. Notes: Euro area aggregates.
9 www.ecb.europa.eu ©Bank lending in 2020 characterised by large cross-country heterogeneity
• In few countries (CY, CZ, GR, IE, LT, PL, SI) lending to NFCs and households decelerated in the
course of 2020, while others reported large increases in lending to NFCs (ES, FR, PT, SE) or to
households (BE, BG, LU, SE).
Outstanding amounts of loans (blue bars) and of debt
securities issued (green bars) in the domestic economy, Outstanding amounts of loans to households in the
non-financial corporations, Jan 2020- Dec 2020 domestic economy, Jan 2020 - Dec 2020
(Index: Loans January 2020 = 100) (Index: January 2020 = 100)
115 115
110 110
105
105
100
100
95
95
90
90
85
80 85
AT BE BG CY CZ DE DK EE ES FI FR GR HR HU IE IT LT LU LV MT NL PL PT RO SE SI SK AT BE BG CY CZ DE DK EE ES FI FR GR HR HU IE IT LT LU LV MT NL PL PT RO SE SI SK
120
100
Source: ECB Balance Sheet Items, ECB Securities Statistics and ESRB Secretariat calculations.
80 Notes: the blue bars show the outstanding amount, at the end of each month in 2020, of loans to non-financial
60 corporations and to households, indexed to January 2020 = 100. The green bars show the outstanding
40 amounts of debt securities issued by non-financial corporations, between January and December 2020,
20
indexed to loans to non-financial corporations in January 2020 = 100. For debt securities, data is available on a
monthly basis only for euro area countries.
0
AT BE BG CY CZ DE DK EE ES FI FR GR HR HU IE IT LT LU LV MT NL PL PT RO SE SI SK
10 www.ecb.europa.eu ©Economic agents increased their holdings of liquid assets
• Deposits of NFCs and households significantly increased since the onset of the pandemic
(despite the low level of interest rates).
• Euro area banks increased their cash holdings by more than EUR 1tn to build a buffer in the
face of heightened uncertainty.
Changes in cash and other assets
Outstanding amounts of deposits by non-financial corporations (left-hand
(EUR trn)
side) and by households (right-hand side) on domestic banks (EUR trn) Cash
Other assets
3.6 Total assets
9.2
2.0
3.4 9
3.2 8.8 1.5
8.6
3 1.0
8.4
2.8
0.5
8.2
2.6
8 0.0
2.4
7.8
-0.5
2.2 7.6
2 7.4 -1.0
-1.5
2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3
Source: ECB Balance Sheet Items and ESRB Secretariat calculations. Source: SSM supervisory data and ESRB Secretariat calculations.
Notes: outstanding amount of deposits of households and non-financial corporations, for the EU 27 Notes: based on supervisory information published by the SSM on
for the period January 2018 to December 2020. the banks under its direct supervision.
11 www.ecb.europa.eu ©Policy priorities for addressing risks in the NFC sectors
• Continue public support measures until the economic recovery is firmly
entrenched on the back of the rollout of vaccinations.
• Gradually move to more targeted support measures to avoid supporting (i)
companies that can operate without public support; and (ii) unviable companies.
• Increasingly complement liquidity support with equity support for viable, but
already highly indebted companies (potentially in the form of quasi-equity
injections, subsidies and the restructuring of debt to banks and other creditors).
• Address deficiencies in bankruptcy frameworks; implement preventive
restructuring; strengthen capacity/efficiency of the judiciary to be able to handle
a surge in bankruptcies.
12 www.ecb.europa.eu ©Thank you for your attention
For more information at the ESRB website:
https://www.esrb.europa.eu/home/search/coronavirus/html/index.en.html
Database of public support measures
A new publication
tuomas.peltonen@ecb.europa.eu
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