European Regulators Weigh 20% Cap on Profits for Bank Dividends

European regulators are weighing a more conservative approach than the Bank of England to the amount of profit that lenders can return to shareholders through dividends, people with knowledge of the matter said.

Regulators are considering whether to cap dividend payments for only the strongest banks in the first nine months at about 20% of profit as they seek to retain capital within the financial system, the people said, asking not to be identified as talks are private. The cap is below the 25% of profit that the U.K. regulator said on Thursday that banks could start paying from next year.

The terms have yet to be agreed upon and could still change when the ECB’s supervisory board decides whether and how to lift the ban at a meeting next week, said the people. That body is made up of ECB-appointed officials and top national banking regulators. Bloomberg reported on Thursday that regulators were considering a compromise that would prolong the de facto ban while allowing only the region’s best capitalized lenders to resume payouts.

An ECB spokesman 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.

Banks would have to show that they have enough capital to swallow losses and keep lending even if they make a reduced dividend payment, said the people.

The Bank of England said it will allow lenders to make payouts that don’t exceed 0.2 percentage points of their risk-weighted assets, or 25% of cumulative quarterly profits over 2019 and 2020 after deducting shareholder distributions.

European officials have been in touch with their counterparts and are aware of the competitive pressures that banks face across jurisdictions, said the people. The ECB will also call on banks to exercise restraint when awarding staff bonuses for their performance in 2020, said the people.

©2020 Bloomberg L.P.

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