The European Central Bank (ECB) decided not to extend the recommendation (ECB/2020/62) that all banks limit dividends beyond September 30, 2021. Thus, the next decisions on dividend payouts should take place in the fourth quarter of 2021. ECB advises banks to adopt a prudent and forward-looking approach when deciding on remuneration policies too. In this context, ECB also updated the frequently asked questions (FAQs) on supervisory measures in response to the COVID-19 outbreak, to incorporate this recent guidance.
In March 2020, ECB asked banks not to pay dividends with the aim of boosting their capacity to absorb losses and to support lending to households, small businesses, and corporates during the COVID-19 pandemic. ECB issued a similar recommendation in July 2020 too while it recommended for banks to limit their dividend payments in December 2020. Similar recommendations applied to share buybacks. Supervisors have reviewed credit risk practices of banks during the pandemic. Also, the latest macroeconomic projections confirm economic rebound and point to reduced uncertainty, which is improving reliability of the capital trajectories of banks. Thus, ECB decided that it is appropriate to reinstate the previous supervisory practice of discussing capital trajectories and dividend or share buyback plans with each bank in the context of the normal supervisory cycle.
However, ECB advises banks to remain prudent when deciding on dividends and share buybacks, carefully considering the sustainability of their business model. Banks are also urged to not underestimate the risk that additional losses may later have an impact on their capital trajectory as support measures expire. When assessing a capital trajectory and distribution plans of a bank, supervisors will take a forward-looking view duly informed by the results of the 2021 stress test. Supervisors will also carefully consider the bank’s credit risk practices which may affect the credibility of its capital trajectory. Supervisors will engage with banks over the Summer 2021 as part of the regular supervisory dialog. As part of the supervisory review process, ECB will also continue to assess remuneration policies and the impact such policies may have on the ability of banks to maintain a sound capital base. The national competent authorities are expected to follow the same approach with the banks they directly supervise.
Keywords: Europe, EU, Banking, Dividend Distribution, COVID-19, Remuneration, SREP, Credit Risk, Share Buybacks, Regulatory Capital, Basel, FAQ, ECB
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