Danger of recession: Banks in the storm of crises

US bank balance sheets are mixed. War, inflation and economic slump also burden the German financial sector. How are the institutes doing compared to the competition?

One should be prepared for an economic hurricane: With this warning, the head of the largest US bank JP Morgan, Jamie Dimon, caused an uproar on Wall Street last summer. According to Dimon, the war in Ukraine and the US Federal Reserve’s tighter monetary policy could cause serious turbulence in the global economy.

Rising interest rates help the industry

At least JP Morgan weathered this storm well. The bank made a whopping billion-dollar profit last year, mainly because of the higher interest rates. In the fourth quarter alone, JP Morgan increased profits by six percent to eleven billion dollars. The default rates for loans are still low, and US companies are also in good shape, according to the bank. Goldman Sachs, on the other hand, reports high losses in the private customer business.

German banks are also exposed to a whirlwind from the Ukraine war, inflation and interest rates. At least the rising interest rates are playing into the hands of the German financial institutions. For a long time they had demanded higher interest rates from the European Central Bank (ECB). Now that the turnaround in interest rates is here, the banks are doing better business again.

“Although investors have to be granted higher interest rates on deposits, the interest rates that can be charged for construction financing, investment financing and consumer loans have also risen significantly, so that the interest margins are moving upwards,” says Volker Brühl, professor at the Center for Financial Studies at the Frankfurt Goethe University. “That means you’re now making money again in the classic lending business.”

With the recession, business collapses

The flip side of the coin: Higher interest rates can dampen companies’ demand for credit and thus slow down economic growth. There are already first signs. According to the ifo Institute, it is becoming increasingly difficult for companies to get credit because banks have become more cautious when lending. In December, the number of insolvencies in Germany rose by around three percent compared to the previous month.

Less money from banks for companies, which increases the risk of a recession in Germany. And that’s exactly what – a shrinking economy – could do to the banks, says market analyst Tim Oechsner from Steubing Wertpapierhandelsbank: “A recession means that many corporate customers will then probably ask for fewer loans because business simply collapses. The economic basis in the real economy is shrinking, which means fewer applications are being made and fewer loans being granted. In this respect, the business volume of the banks is decreasing.”

A lot of staff has been laid off

After all, market observers are now assuming only a mild recession of just minus 0.1 percent. And another sign provides confidence that German banks will not falter in the foreseeable future: in recent years, the financial institutions have fine-tuned their own structure a lot. “We’ve invested heavily in digitization, and staff have been cut,” says financial expert Brühl. “In this respect, the key figures at the German banks have improved significantly.”

German credit institutions are not currently considered takeover candidates either. But that has less to do with their own strength and more to do with the uncertain macroeconomic environment that deters major foreign banks from shopping sprees in Germany.