ECB Lowers Deutsche Bank's Capital Requirements, Allowing It To Pay Bonuses
While Deutsche Bank has had a generally terrible year, with its stock price plunging to all time lows on capitalization (and, at times, liquidity) concerns following the now concluded episode of its RMBS fine which the bank settled last week for roughly $7 billion of which just over $3 billion in actual cash payments, well below Wall Street’s worst case scenario, another far more important open item was whether DB executives and staffers would receive a bonus in a year in which markets seriously wondered if the biggest European bank would get a government bailout.
Here, the the rumormill was in overdrive: in October speculation was rampant was that DB would skip cash bonuses, making payments in shares of non-core units of the bank; other rumors tied bonus payments to the company’s share price, while in yet more rumors, some suggested that DB would cancel or even clawback bonuses for/from former executives. In any case, had DB not succeeded in settling its RMBS litigation, it was assured that the German lender would not pay any bonuses to anyone.
So now that that particular episode in the bank’s history has been concluded, and the management team got an implicit greenlight to make bonus payments… a new problem emerged: Deutsche would be in further breach of its capital requirement had it made billions in bonus payments.
Fast forward to this morning when the ECB once again rode to the rescue, if not so much of Deutsche Bank the company, then certainly the employees of the German bank, and as Reuters reported overnight, Mario Draghi agreed to lower the minimum capital requirements for Deutsche Bank on Tuesday, “giving the lender more leeway to structure bonus payments and dividends.”
Deutsche Bank said the ECB requires it to maintain a phase-in common equity tier 1 (CET 1) ratio of at least 9.51% on a consolidated basis, starting January 2017. This is below Deutsche Bank’s current requirement of 10.76 percent, a threshold the bank cannot fall below this year without having to limit dividends, variable remuneration and coupon payments to holders of Additional Tier 1 instruments, the bank said.
The drop in requirements for 2017 comes after a change in the rules. The ECB now expresses parts of its capital demands as voluntary guidance.
The ECB demanded that, on average, banks hold Core Equity Tier 1 capital, a key measure of their own funds, equal to 8.3% of their risky assets if they are to pay out to staff and investors. Once capital guidance is factored in, the ECB’s demands were stable year on year at 10.1%.
However, as it turns out, when that particular number makes the payment of bonuses impossible, “further revisions” are to be implemented with the blessing of the European Central Bank.