ECB Urges Banks to Pause Shareholder Payouts for Longer
The European Central Bank (ECB) headquarters stands in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

ECB Urges Banks to Pause Shareholder Payouts for Longer

The European Central Bank extended a de facto ban on banks returning capital to shareholders and urged them to show restraint on bonuses after the coronavirus outbreak, dealing a blow to lenders who lobbied for business as usual.

The supervisor asked that banks not pay dividends or buy back shares at least until January, three months longer than initially indicated, and “to be extremely moderate with regard to variable remuneration,” according to a statement Tuesday. The ECB said it will review its stance again in the fourth quarter.

Separately, the Bank of England said it will also conduct a review at the end of the year of any plans by Britain’s biggest banks to pay dividends or resume buybacks. At the BoE’s urging, HSBC Holdings Plc, Barclays Plc and Lloyds Banking Group Plc, among other large firms, suspended payouts earlier this year.

ECB Urges Banks to Pause Shareholder Payouts for Longer

Both central banks had told lenders in March to conserve capital as lockdowns to combat the pandemic brought the economy to a standstill. While the move was painful for some companies and their investors, the ECB indicated it was a trade-off for unprecedented regulatory relief it had granted them to weather the crisis.

Since then, banks including BNP Paribas SA have been lobbying to resume dividend payments as they seek to shore up slumping share prices, Bloomberg reported. A historic trading rally, regulatory relief, and extensive government loan guarantees have bolstered earnings at several banks. Switzerland’s UBS Group AG indicated last week that it may return more capital to shareholders toward the end of the year.

ECB Urges Banks to Pause Shareholder Payouts for Longer

“We know that investors have not been particularly pleased with our decision, but we think this is a necessary action to be taken at this stage of heightened uncertainty,” Andrea Enria, the ECB’s top banking watchdog, told reporters on Tuesday. “It is important to ask banks to focus their capital resources on lending and loss absorption.”

ECB Urges Banks to Pause Shareholder Payouts for Longer

Bloomberg reported last week that the ECB was leaning toward extending the ban on dividends until at least the end of the year.

The ECB said it will take into account the economic environment, stability of the financial system and banks’ ability to plan their future capital levels when it reviews its stance again. Banks may resume dividends once the uncertainty subsides, even with levels of financial strength that are below the ECB’s overall demands, as long as the lenders can show “that their capital positions are sustainable in the medium term,” the watchdog said.

The BoE said its assessment in the fourth quarter “will be based on the current and projected capital positions of the banks and will take into account the level of uncertainty about the future path of the economy, market conditions and capital trajectories prevailing at that time.”

Stress Test

The 23-member Euro Stoxx Banks Index was little changed as of 12:35 p.m. in Frankfurt, after falling 34% this year.

The ECB also conducted an assessment of how vulnerable euro-zone banks are to various scenarios for how the economy could be affected by the pandemic. The findings included:

  • In the central scenario of a “harsh” recession, banks’ aggregate common equity Tier 1 ratio would fall by about 1.9 percentage points to 12.6% by the end of 2022
  • In the “severe” scenario, the ratio would decline by 5.7 percentage points to 8.8%
  • In that case, “several banks would need to take action to maintain compliance with their minimum capital requirements, but the overall shortfall would remain contained”
  • “Overall, the results show that the euro-area banking sector can withstand the pandemic-induced stress”

The results should reassure investors that eurozone banks will be able to withstand the shock simulated in the main scenario, analysts at Citigroup Inc. said in a report on Tuesday in London.

The central bank has previously said its dividend request kept about 30 billion euros ($35 billion) of capital in the euro-area banking system. It has urged banks to comply on a voluntary basis, although Enria said the ECB can put in place binding measures if individual lenders don’t do as asked.

Germany’s cooperative banks said the ECB went too far and doesn’t recognize that some lenders are strong enough to make payments.

“It’s clear that if a bank has very significant capital buffers above minimum requirements, those banks would be particularly annoyed,” Enria told reporters. “It is appropriate at this stage to have a one size fits all recommendation” given the uncertainty and need to prevent banks from cutting back on lending, he said.

The ECB reiterated a call for banks to dip into their capital buffers to maintain the flow of credit. The supervisor said it won’t require banks to start replenishing buffers until after capital depletion reaches its peak, at any rate not before the end of 2022.

The central bank said that it won’t extend much of the operational relief it afforded banks in addressing deficiencies such as inadequate risk models, although lenders with levels of bad debts will be granted an additional six months to submit their plans for dealing with such soured loans.

©2020 Bloomberg L.P.

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