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ECB’s Bank Payout Decision Complicated by Worsening Pandemic

ECB Decision on Bank Payouts Complicated by Worsening Pandemic

European banking regulators, who had been moving closer to lifting a de-facto ban on dividends, are now increasingly worried about the worsening economic outlook and its impact on lenders’ balance sheets because of the resurgent coronavirus.

As banks press regulators to reinstate dividends, one compromise option being considered by officials is allowing stronger banks to pay a dividend but limit the amount of annual profit they can pay out, according to people with knowledge of the matter. The uncertain outlook caused by the pandemic could still sway officials gathered at the European Central Bank toward extending the ban, the people said, asking not to be identified as the matter is private.

The ECB’s supervisory board, which includes national regulators as well as ECB officials, remains divided despite some members previously shifting their position to support lifting the ban early in the new year. Now that the second wave of the coronavirus has arrived, they’re worried about banks’ ability to cope with losses and keep lending to the stricken economy.

While some officials want to keep the request to suspend payments for at least several months longer, others want to allow banks to decide on payments if they have sufficient capital strength, the people said. A third scenario includes restricting the banks to paying out a limited percentage of annual profit.

A growing number of lenders from the Nordic region to the Iberian peninsula are pushing the ECB for permission to resume dividends after the ban hammered already beaten-down stock prices. They’re facing central bank officials that want lenders to conserve capital to keep lending after the pandemic wreaked havoc on the economy. The ECB has indicated that holding back dividend payments is a part of a trade-off with public authorities after they received unprecedented state support and regulatory relief.

The ECB has said that its request has kept about 30 billion euros ($35.5 billion) of capital within the banking system.

ECB’s Bank Payout Decision Complicated by Worsening Pandemic

An ECB spokeswoman said “a decision on this issue has not been taken,” without commenting further. The central bank has said it will take a decision on dividends in December. A key factor will be economic projections by ECB staff due to be published on Dec. 10, the people familiar with the matter said. The Governing Council holds a policy meeting that day, with most economists expecting it to add more monetary stimulus to support the flagging economy.

The sticking point now is just how badly the second wave will hit the economy and whether banks have sufficient reserves to swallow losses on loans without needing bailouts, said the people. Proponents of dividends argue that the ban could make investors lose faith in banks, while those who want to extend it say shareholders must remain patient to safeguard their survival.

The Governing Council effectively has to approve any decision by the ECB’s bank oversight arm to allow a resumption of dividend payments, and that could be an issue. Its emergency bond-buying program is specifically tied to the duration of the “crisis phase” of the pandemic, and some officials may object to allowing bank payouts while the crisis is still under way.

Regulators should extend limits on banks’ capital distributions to help protect the financial system in case the global economic recovery proves slow, the International Monetary Fund said in a section of a report released on Friday.

Andrea Enria, who leads the supervisory board, has stressed that the ban is an extraordinary measure to deal with the fallout from the pandemic and will not become a regular tool for the ECB.

“I will be as happy as everyone else when we can go back to our standard practice, which is to only intervene and limit the distribution of dividends for weaker banks,” Enria said in an interview with Handelsblatt published this month. “But before we lift our ban on dividends, we need to be clearer about where the economy is heading. We will also need to be able to determine how reliable and robust banks’ capital planning is again.”

©2020 Bloomberg L.P.