After ECB Dividend Cap Flouted, Finnish FSA Mulls Next Step
The Euro sculpture illuminated outside the Eurotower, the former headquarters of the European Central Bank (ECB) in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

After ECB Dividend Cap Flouted, Finnish FSA Mulls Next Step

Finland’s financial watchdog is trying to figure out how to respond after a lender it oversees explicitly disregarded the European Central Bank’s guidelines on shareholder rewards.

The decision by Alandsbanken Abp, announced on Jan. 1, to pay almost four times the dividend cap set by the ECB is “unfortunate,” Jyri Helenius, head of banking supervision at the Finnish Financial Supervisory Authority, said in an interview. The lender acted without its watchdog’s permission, but Helenius acknowledged there’s not much he can do about it.

“We expect banks to comply with the recommendation, even though we aren’t able to make it legally binding,” Helenius said. “It’s unfortunate that a Finnish bank is slipping from the common European front on this.”

Last month, the ECB lifted a de facto ban on dividends but urged banks to limit such shareholder payouts to less than 15% of profit for 2019 and 2020, or 0.2% of their key capital ratio, whichever is lower. Alandsbanken says it plans to pay out 59% of 2019’s earnings, citing record profits that year.

The lender’s Class A stock, adjusted for being ex-dividend today, surged as much as 20%, and traded 10% higher at 23.80 euros as of 11:14 a.m. Helsinki time.

The cap on bank dividends in the euro zone is stricter than in the U.K. and Switzerland and has prompted criticism from some corners of the financial industry. ​

The decision by Alandsbanken, despite the lender’s small size, “is highly symbolic,” analysts Sauli Vilen and Matias Arola at Inderes wrote in a note on Monday. The bank’s reasoning isn’t unique and could be employed by other small lenders, they said. Even so, the analysts continue to expect other banks to adhere to the ECB’s guidelines.​

Nordea Bank Abp, the biggest lender in both Finland and the Nordics, has said it will follow the dividend recommendation but that it will contact the ECB to “discuss the intended level of distribution,” noting that it is “one of the best capitalized banks in Europe.”

Alandsbanken, which is too small to come under direct ECB supervision, said the latest guidelines fail to take into account the comparative strength of some banks in the euro area.

Long-Term Risks

Holding back on dividends could alienate the very investors Alandsbanken relies on to grow, it said. “The long-term risks to the bank may be larger” if shareholders don’t get a substantial portion of profits, it said. That’s why it’s “choosing not to follow” the guidance of the Finnish FSA and, by extension, the ECB, it said.

The Finnish FSA will “engage” with lenders that ignore the ECB’s guidance, Helenius said. “It’s very exceptional that a bank would disregard our recommendation,” he said.

Helenius is now urging the financial industry to be patient. Once the ECB repeals its recommendation, set to be in place through September, “at least in Finland it will be possible then for banks that have enough capital to pay dividends for both 2019 and 2020,” he said.

The ECB directly oversees the biggest euro-zone lenders while national regulators in the bloc supervise smaller banks, some of which have been allowed to pay dividends. German regulator BaFin has said it will permit payouts if financial firms have sufficient financial strength.

©2021 Bloomberg L.P.

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