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Banking Regulators Favor Longer Dividend Ban With Exceptions

Banking Regulators Favor Longer Dividend Ban With Exceptions

European watchdogs are leaning toward extending the de facto ban on bank dividends well into next year, while allowing some lenders to make payouts if they can show sufficient financial strength, according to people familiar with the matter.

A potential compromise solution is building among central bankers and regulators that lenders should only be allowed to resume payouts when they have enough capital to absorb future losses stemming from the pandemic, the people said, asking not to be identified because the deliberations are private.

The European Central Bank’s supervisory board, made up of ECB-appointed officials and top national banking regulators, is set to decide on whether and how to lift the ban at a meeting next week. It’s not yet clear which criteria will be used to determine the banks that have the strength to resume payouts.

An ECB spokeswoman declined to comment.

European lenders, whose shares have lagged behind the broader market this year, have repeatedly warned that restricting their ability to pay dividends risks cutting them off from investors. Despite optimism that the end of the pandemic is in sight after successful vaccine trials, some regulators are worried that if they allow a full return to payouts, banks may lack the financial reserves to bear losses without taxpayer bailouts.

European banking stocks extended declines with the 22-member Euro Stoxx Banks Index falling 2.6% as of 3:14 p.m. in Frankfurt. It has slumped 22% this year.

Banking Regulators Favor Longer Dividend Ban With Exceptions

Dividends were effectively frozen in March in a trade-off for unprecedented regulatory relief and government loan guarantees. While several watchdogs and senior monetary policy officials have since come round to the idea of allowing strong banks to resume payouts early next year, others have emphasized that banks need to preserve capital for lending amid continued economic uncertainty.

ECB President Christine Lagarde said on Thursday in Frankfurt that despite optimism, there are factors that could hamper the recovery.

“The news of prospective roll-outs of vaccines allows for greater confidence in the assumption of a gradual resolution of the health crisis,” she told reporters. “However, it will take time until widespread immunity is achieved, while further resurgences in infections, with challenges to public health and economic prospects, cannot be ruled out.”

ECB Forecasts

The ECB expects the euro economy to shrink 7.3% this year and grow 3.9% in 2021, she said. That’s a less severe forecast for 2020 than the ECB made three months ago, but also a slower rebound.

Those figures will feed into the decision by the supervisory board. Several central bankers have spoken out in favor of a return to payouts next year, yet regulators have subsequently taken a more hawkish tone.

Helmut Ettl, a member of the supervisory board, urged banks to remain “very, very cautious” with dividend payouts as they brace for the impact of the coronavirus pandemic.

“Our approach continues to be that buffers and equity should be kept strong, and hence our stance is that we should remain very, very cautious with dividends,” Ettl, who is also the co-chairman of Austria’s banking regulator, told reporters in Vienna. “As little capital as possible should flow out of the banks’ books.”

Banking Regulators Favor Longer Dividend Ban With Exceptions

Ed Sibley, another member of the supervisory board, said in an interview with Bloomberg News last week that Europe should extend the de-facto ban on payouts by six months. Still, he acknowledged that implementing it in practice remains a challenge because the ECB doesn’t have the powers to enforce a blanket ban over mounting objection by lenders.

Maintaining the ECB’s recommendation that banks not pay dividends while putting the burden of proof on lenders to demonstrate that they can could be a compromise in the debate among watchdogs.

The ECB has said its recommendation kept about 30 billion euros ($36 billion) in the banking system that otherwise would have gone to investors. Banks have touted their financial strength as a reason to be allowed to resume payouts, although those metrics have also been buoyed by regulatory relief and fiscal stimulus measures.

©2020 Bloomberg L.P.