ECB Steps Up Pressure on Bank Dividends to Weather Virus Crisis

(Bloomberg) -- The European Central Bank increased the pressure on banks to curb dividends and bonuses during the coronavirus crisis, saying it could impose legally binding measures if lenders don’t fall in line.

The ECB expects all banks to follow its recommendation to delay dividends until at least October, Andrea Enria, the institution’s top banking watchdog, told Bloomberg TV on Tuesday. While he didn’t single out any banks, it was a clear warning to firms that have been slow to act, especially French banks that have promised large sums to shareholders.

The increasingly hard line from the ECB underscores that regulators and governments want banks to do their part after offering them unprecedented support in the form of loan guarantees and temporarily allowing them to tap capital buffers. While shareholders stand to benefit if banks survive the economic standstill, the loss of dividends is a major setback in an industry that has long lagged behind the wider stock market.

“We want to instill in banks a strong commitment to preserve every euro of capital that could be useful to lend to the economy,” Enria said. “If banks decide not to comply with the recommendations, we will decide whether to take other measures; we can also take legally binding measures if need be.”

Tougher Line

That marks an escalation from last week, when Enria encouraged European lenders to hold off paying dividends until at least October but didn’t suggest that the ECB may force them to act. While several banks announced on Monday that they would follow his recommendation, others are still thinking it through.

French Lenders Societe Generale SA and BNP Paribas SA are aware of Enria’s advice and are looking into it, their spokespeople have said. Natixis SA’s board of directors will meet to consider the matter this week, a spokesman said. Credit Agricole SA’s board, which next meets on April 14, would have to propose any such changes to the bank’s shareholders, it said. The small French banks who own a majority stake in Credit Agricole use the payouts to help fund the local economy, a spokeswoman said.

“I am very pleased to see that banks are reacting very positively,” he said. “I think that’s an important step for their own reputation for showing corporate responsibility in a difficult time for our economies.”

The ECB said last week that halting the return of funds to shareholders would allow banks to retain 30 billion euros ($33 billion) of capital which they could use to lend more or absorb losses if credit turns bad.

Enria also said that he is encouraging banks to show moderation on staff bonuses, although that’s less important than dividends given the amount of capital involved.

“Banks, shareholders, managers and key risk takers should also take part in the rethink of where we are right now,” he said. “Showing restraint on bonuses also means paying them in shares or share-linked instruments,” he said.

Freeing Capital

Earlier this month, the ECB freed up 120 billion euros of capital by allowing banks to dip into some of their buffers and use subordinated debt to help fill a key requirement.

The ECB has no plans to suspend payments on those types of notes and banks’ capital levels are still “very far” from where the bonds would be wiped out or converted to equity, Enria said.

Enria said it is important for investors to understand that there’s no stigma for banks who tap into their capital and liquidity.

“These conservation measures are not reflecting a specific fragility that we see right now in the banking sector, it’s really aimed at maximizing the firepower of banks to support their customers,” Enria said. “There is a ratcheting up in the demand for credit from corporates, especially those that are probably meeting some difficulties in terms of the freeze in their revenue.”

©2020 Bloomberg L.P.