In response to the continuing COVID-19 crisis, EBA and ECB have updated their guidance on capital distribution and variable remuneration policies of banks. Both EBA and ECB recommend that banks should continue to apply conservative approach on dividends and other distribution policies, including share buybacks. ECB has asked all banks to consider not distributing cash dividends or conducting share buybacks, or to limit such distributions, until September 30, 2021. In addition, ECB recommended that banks should adopt extreme moderation on variable remuneration until September 30, 2021. ECB also updated the frequently asked questions (FAQs) on supervisory measures in response to COVID-19 pandemic to reflect this updated guidance.
As per the revised recommendation, ECB expects dividends and share buybacks to remain below 15% of the cumulated profit for 2019-20 and not higher than 20 basis points of the Common Equity Tier 1 ratio, whichever is lower. Banks that intend to pay dividends or buy back shares need to be profitable and have robust capital trajectories. They are expected to contact their Joint Supervisory Team to discuss whether the level of intended distribution is prudent. Banks should refrain from distributing interim dividends out of their 2021 profits. Post September 2021, in the absence of materially adverse developments, ECB intends to repeal the recommendation and return to assessing banks’ capital and distribution plans based on the outcome of the normal supervisory cycle. This recent recommendation replaces the March 2020 ECB recommendation that called for a temporary suspension of all cash dividends and share buybacks. ECB also recommends that national supervisors should apply the same approach to less significant banks under their direct supervision, as appropriate.
Furthermore, ECB specifies that, to achieve an appropriate alignment with risks stemming from the COVID-19 pandemic, a larger part of the variable remuneration of material risk-takers should be deferred for a longer period and a larger proportion should be paid out in instruments. Competent authorities should continue to monitor banks’ remuneration policies, to ensure that they are consistent with an effective risk management and long-term interest of a bank. ECB highlighted that the appropriateness of institutions’ remuneration policies and practices will form part of the supervisory assessment within the 2021 Supervisory Review and Evaluation Process.
Keywords: Europe, EU, Banking, COVID-19, Dividend Distribution, Share Buybacks, Remuneration, FAQ, Regulatory Capital, Basel, EBA, ECB
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