The ECB has lifted the veto on the distribution of dividends from the bank, which will be able to return to remunerating its shareholders from next October 1. The body led by Christine Lagarde relies on the improvement of the macroeconomic environment to make this decision, which the president of the Supervisory Board, Andrea Enria, had already advanced weeks ago. “The latest macroeconomic projections confirm the economic rebound and indicate reduced uncertainty, which is improving confidence in banks’ capital trajectories,” explains the European banking supervisor. Thus, on October 1, a ban that has been in force since the end of March 2020 will end.
It is not the first time that the ECB has opened its hand on this matter. Already last December it allowed banks to distribute a maximum of 15% of their profit only if they do not exceed the ratio of maximum quality capital over risk-weighted assets by 20 basis points.
Now, the end of the veto is final, although industry experts point out that it was at least controversial. “The ECB’s decision not to allow banks to pay dividends to their shareholders was a measure with little sense in a competitive market, in which investors who seek to optimize their investment as much as possible have found themselves with a penalty and those who have wanted to invest in bank shares they have been able to see in that decision a dissuasive barrier whose reason they have not understood ”, explained to ABC Carlos Balado, professor at OBS Business School and director of Eurocofin.
Of course, the end of these restrictions does not mean that entities have absolute freedom to distribute dividends. Despite the improvement in macroeconomic forecasts, the supervisor understands that the health crisis has not ended. In its statement, the ECB says it will continue to closely monitor companies to determine whether or not they are remunerating their shareholders.
The ECB states that “banks must remain prudent in deciding their dividend distribution and share buyback policies.” To do this, it asks “to carefully monitor the sustainability of its business model” and to adopt “prudent and forward-looking” measures. In addition, it recommends that entities “do not underestimate the risk that additional losses may have later in capital” when the credit support measures end.
Balado still maintains that the veto was “perhaps a hasty or little studied measure, because the ECB has asked and is asking the banks to reinforce themselves with capital, but they have limited this possibility by preventing that capital from being repaid. The reason was based on the fact that, by not distributing a dividend, more funds were available to face the crisis ”. But he points out that two issues were left. One, that banks were discriminated against with respect to other sectors; and two, that individuals who buy shares as a form of savings were harmed and the dividend “is income for them.”
Although this measure only affects entities directly supervised by the ECB, the body also says that national supervisory authorities – in the case of Spain, the Bank of Spain – will soon adopt similar measures for the banks under their supervision.