ECB published a recommendation (ECB/2020/1) for dividend distribution policies of credit institutions. ECB states that credit institutions should establish dividend policies using conservative and prudent assumptions, after any distribution, to satisfy the applicable capital requirements and the outcomes of the supervisory review and evaluation process (SREP). This recommendation is addressed to significant supervised entities and significant supervised groups. It is also addressed to the national competent authorities and designated authorities with regard to less significant supervised entities and less significant supervised groups. The national competent and designated authorities are expected to apply this recommendation to such entities and groups, as deemed appropriate.
With regard to credit institutions paying dividends in 2020 for the financial year 2019, ECB recommends the following:
- Category 1: Credit institutions that satisfy the applicable capital requirements and have already reached their fully loaded ratios as referred to in paragraphs 1(d) and 1(e) of ECB/2020/1, as applicable, as at December 31, 2019 should distribute their net profits in dividends in a conservative manner to enable them to continue to fulfill all requirements and outcomes of the SREP, even in the case of deteriorated economic and financial conditions.
- Category 2: Credit institutions that satisfy the applicable capital requirements as referred to in paragraph 1(a), (b), and (c) of ECB/2020/1 as at December 31, 2019, but have not reached their fully loaded ratios as referred to in paragraphs 1(d) and 1(e) of ECB/2020/1, as applicable, as at December 31, 2019 should distribute their net profits in dividends in a conservative manner to enable them to continue to fulfill all requirements and outcomes of SREP, even in the case of deteriorated economic and financial conditions. Furthermore, they should in principle only pay out dividends to the extent that paragraph 1(d) is also fulfilled and, at a minimum, a linear path toward the required fully loaded capital requirements as referred to in paragraph 1(e) and outcomes of the SREP is secured;
- Category 3: As per paragraph 1(a) in this recommendation, credit institutions are required to satisfy the applicable minimum capital requirements (Pillar 1 requirements) at all times. This includes a Common Equity Tier 1 capital ratio of 4,5 %, a Tier 1 capital ratio of 6 % and a total capital ratio of 8 % as provided for by Article 92 of Regulation (EU) No 575/2013. As per paragraph 1(b), credit institutions are required to satisfy at all times the capital requirements that are imposed by the decision following the SREP in application of Article 16(2)(a) of Regulation (EU) No 1024/2013 and which go beyond the Pillar 1 requirements (‘Pillar 2 requirements’). As per paragraph 1(c), credit institutions are also required to satisfy the combined buffer requirement as defined in Article 128(6) of Directive 2013/36/EU. Credit institutions that are in breach of the requirements referred to in paragraphs 1(a), (b), or (c) of ECB/2020/1 should in principle not distribute any dividend.
Credit institutions that are not able to comply with this Recommendation because they consider themselves legally required to pay-out dividends should immediately contact their joint supervisory team. Credit institutions in categories 1, 2, and 3 are also expected to meet Pillar 2 guidance. If a credit institution operates or expects to operate below Pillar 2 guidance, it should immediately contact its joint supervisory team. ECB will review the reasons why the credit institution’s capital level has fallen, or is expected to fall, and will consider taking appropriate and proportionate institution-specific measures. In their dividend policy and capital management, institutions are also expected to take into account the potential impact on capital demand due to future changes in the Union’s legal, regulatory, and accounting frameworks. In the absence of specific information to the contrary, the future Pillar 2 requirements and Pillar 2 guidance used in capital planning are expected to be at least as high as the current levels.
Related Link: ECB Recommendation
Keywords: Europe, EU, Banking, Securities, Dividend Distribution, Pillar 2, Capital Requirements, Capital Ratios, CET 1, SREP, Recommendation, ECB 2020/1, ECB
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