As The Economy Slows, The Bundesbank Warns Banks Against Making “Careless” Payout Promises

Despite the fact that they are expected to make record profits this year, German banks should refrain from making multi-year pledges to their shareholders because the outlook for the economy is deteriorating. In a recent interview, Joachim, who is a member of the Bundesbank board, said.

He was joining other supervisors at the European Central Bank in ordering lenders to maintain capital; this message has upset bankers as they strive to woo investors to their battered shares. He was joining other supervisors at the European Central Bank in telling lenders to preserve capital.

‘What we fundamentally warn banks against is making medium-term promises to investors about dividend payments,’ Wuermeling, a member of the ECB’s Supervisory Board who oversees the largest lenders in the euro zone, said in an interview. Wuermeling’s responsibilities include monitoring the financial institutions in the euro zone. You put yourself in a very precarious situation if you are obligated to fulfill such pledges despite the fact that the surrounding environment has undergone significant shifts.

After more than a decade of relatively meager returns, banks have begun reporting bountiful profits and declaring dividends and share buybacks as a result of a steep increase in interest rates and a trade boom. This comes as a result of the combination of these two factors.

In defiance of an ECB preference for payout ratios, Italy’s UniCredit (CRDI.MI) has established a fixed figure for shareholder remuneration as part of a plan to 2024. The company’s CEO, Andrea Orcel, has even pledged to meet this year’s goal of 3.75 billion euros in distributions in the following year.

As part of its strategy to distribute 8 billion euros ($8.22 billion) by 2025, Deutsche Bank (DBKGn.DE) plans to increase its next dividend by as much as 50 percent in Germany, where the Bundesbank forecasts a slight recession for the coming year.

The year 2019 will mark the first time since 2020 that Commerzbank (CBKG.DE) has distributed a dividend.

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According to Wuermeling, German banks had only marginally raised their payout ratios in their own plans, and the majority of them should be able to maintain their capital ratios even after taking into account considerable increases in dividends in absolute terms. However, he cautioned that the enormous gains achieved this year should not lead to “carelessness.”

“The following year may bring colder temperatures. Because of this, one of the things that we typically recommend is keeping some of your money in the bank so that you have some cushion in case you incur any losses “he stated.

“The present circumstance, which is still favorable, should not cause one to become casual.”

He went on to say that the German Central Bank was “not happy” with the decision of the European Commission to delay the implementation of the Basel III norms until 2025, but he emphasized that this was “only a temporary divergence” from the globally agreed upon standards.