ECB tells banks not to pay dividends until January 2021 over virus crisis

The European Central Bank (ECB) on Tuesday, July 28, urged banks to refrain from paying dividends or offering bonuses until January 1, 2021, in order to ensure lenders have sufficient buffers to survive the economic storm unleashed by the coronavirus crisis.

The recommendation, which extends a previous call to halt such payments until at least October 2020, “remains temporary and exceptional,” the ECB said in a statement.

The aim is to preserve “banks’ capacity to absorb losses and support lending to the real economy” at a time of “exceptional uncertainty.”

The ECB has taken unprecedented action to cushion the economic impact from the pandemic, launching a 1.3-trillion-euro emergency bond-buying scheme to stimulate growth and keep borrowing costs low.

It has also offered ultra-cheap loans to banks and eased rules on capital buffers to keep credit flowing in the eurozone.

But the Frankfurt institution has repeatedly made clear it expects lenders to make their own extraordinary efforts as well.

In a letter to euro area banks, the ECB’s chief supervisor Andrea Enria said the central bank was paying “close attention” to lenders’ remuneration policies during the crisis.

As well as the dividend freeze, the ECB urged lenders not to buy back shares for the time being, another tool to reward shareholders.

The ECB also expects lenders to show “extreme moderation” in deciding the variable component of bankers’ salaries, Enria said.

“The reputational impact of the payment of variable remuneration in a global crisis situation should not be underestimated,” he wrote.

The ECB’s suggestions are likely to be welcomed by eurozone citizens, many of whom vividly remember the taxpayer bailouts of global banks during the 2008-2009 financial crisis.

Several major firms already said earlier this year that they would scrap their 2019 dividends, among them German airline giant Lufthansa and European plane maker Airbus.

The ECB said it would review its recommendations in the 4th quarter of 2020.

‘Resilient’

In a separate statement, the ECB said a study to gauge banks’ resilience in the face of economic adversity showed “that the euro area banking sector can withstand the pandemic-induced stress.”

In a scenario whereby the eurozone economy shrinks by 8.7% this year, currently deemed the most likely scenario, the 86 banks studied by the ECB would see their average Common Equity Tier 1 (CET1) ratio, a key indicator of financial health, deteriorate “only by 1.9 percentage points to 12.6%.”

“As a result, banks could continue fulfilling their role of lending to the economy,” the ECB said.

Under a more severe scenario in which the euro region’s economy would contract by 12.6% in 2020, banks’ CET1 ratio would be depleted by 5.7 percentage points to 8.8%.

While this means banks would have to take action to maintain their capital requirements, the overall shortfall would still “remain contained.”

“The results show just how important it was that banks strengthened their capital position in recent years as a result of the post-financial crisis regulatory reforms,” Enria said.

“However, if the situation worsens along the lines of the severe scenario, authorities must stand ready to implement further measures” to help banks, he added. – Rappler.com