Streets and offices void of people. Economies in shutdown mode. Governments mobilising billions within the space of only a few days in order to shield the real economy from collapse. We are currently in the throes of a major economic crisis – sparked off by the global coronavirus pandemic.
This crisis is shifting attention to a sector which, now more than ever before, has a responsibility to fulfil its traditional role – that of intermediary between lenders and borrowers. It is now up to the banks: if they fail in the coronavirus crisis to ensure that the funds provided by the government are channelled to the right places, the German economy could be in for some very hard times. Can Germany’s banking sector rise to the challenge?
Financially, yes. The sector as a whole is in good shape. Most institutions have strengthened their balance sheets after the financial crisis of 2007/2008. Significantly in fact. The harsh regulatory reforms following the collapse of Lehman Brothers have also played their part here. The banks now have more capital and more liquidity at their disposal and are therefore more stable. But let’s be honest: if the government had not quickly whisked together a multi-billion package of stimulus measures for the real economy, and if supervisory authorities in Europe had not been equally quick to adjust the regulatory and supervisory framework, the current crisis would have inflicted more significant damage on banks’ balance sheets by now.
Financial supervisors are giving banks as much leeway as can be given under the existing regulatory framework and financial stability requirements. We show flexibility wherever we see obstacles in the way of institutions’ efforts to help the real economy through these difficult times. We are also offering the banks relief on the administrative side. For example, we have already suspended all supervisory inspections, and we are keeping requests for information to a minimum. We have also postponed scheduled stress tests. It can therefore be said that politicians and financial supervisors alike are bearing their part of the burden.
Now it is up to the German banking sector to play its part. This could be done by strengthening the capital resources and ploughing back profits instead of distributing them. The billions of government aid and the latitude the supervisory authorities are currently offering should not be put at risk by allowing capital to flow out of the system in another area.
Early on, we had already stated that we expect the less significant institutions (LSIs) under BaFin’s direct supervision to refrain for the time being from distributing dividends or profits. A similar line was taken a little later by the European Central Bank (ECB) and the European Banking Authority (EBA). Europe’s supervisory authorities all agree: for the time being, dividends for the financial year 2019 should remain where they are needed the most – in the banking sector.
Most of Europe’s large banks have now voluntarily declared their intention to refrain from making distributions, at least until 1 October 2020. This will enable them to strengthen their capital base, which was precisely the objective of the supervisory authorities’ calls for banks to take action. I now expect the small and medium-sized German institutions to follow suit and shoulder their share of the responsibility by temporarily suspending dividend payments.
Coronavirus:Criminal Investigation Office calls on banks to look into suspicious payments
The Criminal Investigation Office of the State of North Rhine-Westphalia (Landeskriminalamt Nordrhein-Westfalen – LKA NRW) has informed banks in the federal state of fraudulent cases in which applications for emergency aid as a result of the coronavirus crisis were made using fake websites.
Credit institutions should thoroughly check payments if they have grounds to suspect that they were made based on certain non-exhaustive criteria, e.g. if the payer is the district government (Bezirksregierung) of Arnsberg, Detmold, Düsseldorf, Cologne or Münster, the payment reference is “Corona-Soforthilfe” (followed by a reference number) or if the payments amount to 9,000, 15,000 or 25,000 euros. If such amounts were credited to accounts that are not business accounts, that have only recently been opened, that are for businesses that have been deregistered, that were not previously used for business purposes, that were opened for minors or that bear a recipient name that differs from the beneficiary stated in the payment reference, this might indicate that the payments made by the district governments of NRW were received as a result of fraudulent activities.
If there are any doubts about a payment, the LKA NRW recommends contacting the police authorities responsible for their district (Kreispolizeibehörde). Under the German Money Laundering Act (Geldwäschegesetz – GwG), the competent authority for handling suspicious transaction reports is the Financial Intelligence Unit (FIU).
Of course, I understand that banks want to meet their shareholders’ expectations. I am equally aware that virtually no institution is likely to toss the supervisory recommendations to the wind. The majority of institutions will carefully weigh up the arguments for and against distributions. But after doing so, they should still come to the conclusion that no dividend distributions should be made for the time being.
Anyone doubting why such a decision makes sense should bear in mind that the banks are amongst those profiting from the multi-billion aid programmes set up by the federal and state governments. If it were not for these programmes or the adjustments made by the supervisory authorities, the majority of the institutions wouldn’t be having any discussions on dividend payments at all at the moment. Another point to consider is that it is still not possible to reliably forecast how severely the crisis will impact banks’ balance sheets.
I would therefore like to make an urgent appeal once again to the managing directors of financial institutions: take your part of the responsibility and do not allow your institution’s capital base to be weakened. Only then will there be a chance of mitigating the economic consequences of the coronavirus crisis. Initial signs from the German banking sector give reason to at least hope this can be achieved.
However, those who brush aside all the recommendations and allow their institutions to distribute dividends in these difficult times should ask themselves whether they are deserving of the full trust of BaFin’s banking supervision. It is now up to the banks!
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