The vice president of the European Central Bank (ECB), Luis de Guindos, has warned that the banking profitability data that have been announced this year could actually be a “mirage effect” given the rise in the cost of capital that is has produced in the markets.

Specifically, the former Spanish minister has indicated in his speech at the XIV Finance Meeting of KPMG and ‘Expansión’ that during 2024 there will be an increase in financing costs and lower credit activity and lower economic growth. In addition to all this, Guindos has also warned that certain alarm signals are beginning to be seen in the definitions of previous default states.

“All this is reflected in the valuations (…) and forces us to be prudent, because perhaps we are witnessing a mirage effect with the improvement of profitability in the banks,” Guindos indicated during his speech. Specifically, he has indicated that the cost of capital for European banks is around 14%, while the return on capital reaches 11%.

Thus, the vice president of the ECB has asked the banks to act prudently not only in the distribution of dividends, but also in the repurchase of shares and even in remunerations. In addition, he has also warned that the absence of a complete Banking Union due to the lack of a common deposit guarantee fund is a “focus of vulnerability.”

The central banker has added that the macro environment is also subject to “enormous uncertainty” due to “low growth” in the coming quarters and because inflation will go down, but will still remain above the 2% objective. “There is a possibility of a correction that is relatively disorderly,” he said.

On the fiscal policy side, Guindos has emphasized that governments “are fundamentally without the capacity to act” and it is even necessary for them to adopt “prudent fiscal consolidation plans” for those that maintain high debt-to-GDP ratios. “Let’s avoid a conflict between monetary and fiscal policy,” she appealed.