The European Central Bank (ECB) has extended until January 1, 2021 its recommendation to banks not to pay dividends to its shareholders, a measure that ABC advanced that had been unofficially communicated to all banks and that represents a precautionary brake in the face of the uncertainty of the coronavirus crisis, as this newspaper has learned. It also does not allow the repurchase of own shares. In this way, it extends the date of its recommendation three months more than originally planned in March.
“This updated recommendation on the distribution of dividends remains temporary and exceptional and aims to preserve the ability of banks to absorb losses and support the economy in this environment of exceptional uncertainty,” said the ECB, assuring that it will give the banks enough time to replenish their capital and liquidity reserves so as not to act procyclically.
At the moment, the recommendation that the ECB made in March to entities not to pay dividends, which is understood in any case as an obligation not to do so, was applicable until October of this year, although the market was already considering the possibility that it would expand until 2021.
In its decision, the ECB has highlighted the high degree of uncertainty, which makes it difficult for banks to accurately forecast their capital positions, noting that the vulnerability analysis carried out in the sector shows that the level of capital in the system could decrease significantly if it were will materialize a severe scenario.
However, the ECB has indicated that it will review whether this position remains necessary in the fourth quarter of 2020, taking into account the economic environment, the stability of the financial system and the reliability of capital planning.
“Once the uncertainty required by this temporary and exceptional recommendation subsides, banks with sustainable capital positions may consider resuming dividend payments,” the ECB said, explaining that this will also apply when operating below the level of Orientation Pillar 2 (P2G) capital, although as a precondition, the projected capital trajectories of banks must demonstrate that their capital positions are sustainable in the medium term.
On the other hand, for the same purpose of preserving the banks’ ability to absorb losses and support loans to the real economy, the central bank also issued a letter to the banks asking them to be extremely moderate regarding payments variable remuneration, for example, by reducing the total variable payment amount.
“When this is not possible, banks should defer a greater part of variable remuneration and consider payments in instruments, such as treasury shares,” said the institution, which will continue to evaluate the remuneration policies of banks as part of its Supervisory Review and Assessment Process (SREP), in particular the impact such policies may have on a bank’s ability to maintain a strong capital base.
In addition, the ECB continues to encourage banks to use their capital and liquidity buffers to lend and absorb losses, reiterating that it will not require banks to start replenishing their capital reserves before the peak of capital depletion is reached, which it is currently expected to occur in 2022. The exact timeline will be decided after the 2021 stress test across the EU and, as in each cycle monitoring, on a case-by-case basis, according to the individual situation of each bank.
“The accumulation of strong capital and liquidity reserves since the last financial crisis has allowed banks during this crisis to continue to provide loans to households and businesses, thereby helping to stabilize the real economy,” said Andrea Enria, Chairman of the Board. Supervision, for whom “it is even more important to encourage banks to use their capital and liquidity reserves now to continue focusing on this general task: loans.”
Finally, given that the banking sector has shown operational resistance, the ECB does not plan to extend the six-month operational relief measures granted to banks in March 2020, with the exception of NPL reduction strategies for entities with high NPL levels.
The ECB will give banks with high NPL levels an additional six months to present their non-performing loan reduction plans to provide banks additional time to better estimate the impact of the Covid-19 pandemic on asset quality, which should allow for more accurate planning.