claudia buch : the deutsche bundesbank's 2020 financial stability review speech by prof claudia buch, vice - president of the deutsche bundesbank, at the press conference to unveil the financial stability review, frankfurt am main, july 2020. * * * ladies and gentlemen, i would like to welcome you to the presentation of the deutsche bundesbank ’ s financial stability review. this year ’ s report focuses on the impact of the coronavirus pandemic on the financial system. “ the financial system should neither cause nor amplify a downturn in overall economic activity, and should perform its functions even in periods of stress. ” our definition of “ financial stability ” may have sounded abstract up until now – but the pandemic has shown in very tangible terms how important a functioning financial system is for the economy. when infection rates surged in the spring and a lockdown was imposed, averting a liquidity crisis and a rise in insolvencies was necessary. enterprises and households were supported by extensive government measures. this largely shielded the financial system from the impact of the crisis – and this was a major reason why it has continued to perform its functions. in the phase of the pandemic that now lies ahead of us, corporate insolvencies are likely to increase. banks currently have capital buffers to absorb higher losses. however, they need to use those buffers to ensure that the credit market continues to function. and : both the public and private sectors need to prepare for an increase in insolvencies. in the medium term, dealing as well as possible with the impending structural change will be one of the main priorities. a well - capitalised and well - functioning financial system will play a crucial role in this. vulnerabilities that existed before the pandemic and which are being further amplified need to be kept in check. phase 1 : liquidity crisis averted parallels are often drawn between the pandemic and the global financial crisis, but these two episodes are not entirely comparable. when the financial crisis hit more than ten years ago, it affected advanced economies more than emerging market economies. the coronavirus pandemic, on the other hand, is affecting the global economy in its entirety. in germany, gdp plummeted by almost 10 % in the second quarter of 2020. the services sector was hit harder than it was during the financial crisis. the first signs of economic recovery are now beginning to emerge, but that recovery

/ 4 bis central bankers'speeches structural change will not fail to leave its mark on the financial system. the pandemic will tend to amplify trends such as digitalisation. ultimately, banks must therefore be able to exit the market if their business models are no longer sustainable – and do so without jeopardising financial stability. thanks to the reforms of the past few years, we now have better instruments at our disposal for dealing with banks in distress. although the financial system has so far coped well with the fallout of the coronavirus pandemic, pre - existing vulnerabilities are likely to increase in the medium term. the measures taken to mitigate the effects of the crisis have driven up debt in the private and public sectors. persistently low interest rates might encourage market participants to take on more risk in a search for yield. credit risk may be underestimated, and the recovery value of collateral overestimated. this is one reason why the real estate market remains a focal point of our analyses. to date, the pandemic ’ s impact on the market for residential real estate has been barely visible. in the second quarter, prices for owner - occupied housing across germany rose by just under 7 % compared with the previous year. recently, banks have issued around 6 % more housing loans on an annual basis, with default rates remaining largely constant. in the commercial real estate market, a rise in insolvencies and weaker demand for office space could have a negative impact. recently, office property prices have risen less sharply than in the preceding years, and retail property prices have actually declined slightly. summary during the pandemic, the financial system has so far fulfilled its key functions. extensive fiscal policy and monetary policy measures have helped avert a looming liquidity crunch in the real economy and protect the financial system. supervisory measures have provided banks with scope for lending : banks should use their capital buffers to absorb losses and continue to supply the economy with credit in an adequate manner. at the same time, they should suspend distributions of dividends. the comprehensive reforms implemented after the global financial crisis are paying off : banks are now better capitalised, have additional capital buffers, and can use them more flexibly. debt levels have risen in the public and private sectors. persistently low interest rates could induce market participants to take on greater risks in a search for yield. we will have to keep an eye on this build - up of risk. after all,