The European Central Bank (ECB) has decided to lift its recommendation on bank dividends. It will expire on September 30, 2021. The restrictions had been put in place in 2020, and were intended to ensure that banks retained sufficient capital to cope with the crisis.
Dividends: restrictions put in place at the start of the pandemic
Back in March 2020, in the midst of the Covid-19 pandemic, the European Central Bank had asked banking institutions to stop paying dividends to their shareholders. The aim was to preserve capital in a highly uncertain economic climate.
In July 2020, the ECB renewed this recommendation, then in December 2020, the institution asked banks to limit dividends, as well as share buybacks.
However, European banks had already tried to convince the European Central Bank, in the last quarter of 2020, that they were in a position to pay dividends again, based on the good results recorded in Q3.
But the second wave of the epidemic reawakened regulators' concerns, prompting them to keep the restrictions in place.
ECB recommendation lifted after September 30, 2021
Following in the footsteps of the Bank of England and the Fed in the USA, the European Central Bank has finally decided to lift the remaining restrictions on dividends. The current recommendation, requiring banks to limit dividend payments, will expire on September 30, 2021.
The European Central Bank justifies its decision with the economic rebound confirmed by the latest macroeconomic projections, which "indicate a decline in uncertainty, reinforcing the reliability of banks' capital trajectories ", says the ECB in a recent press release.
The institution considers it " appropriate to reinstate the previous prudential practice of discussing capital trajectories and dividend distribution or share buyback plans with each bank as part of the usual prudential cycle ".
However, the ECB is urging banks to exercise caution, and in particular not to underestimate " the risk that further losses may subsequently affect their capital trajectory when the support measures come to an end ".
Under normal circumstances, the banks' dividend payments correspond to around 50% of their earnings. Several months ago, the ECB authorized the banks to resume dividend payments, albeit on a limited scale.
Until September 30, 2021, banks must comply with the recommendation still in force: the dividend paid in 2021 must be equivalent to 0.2% of the bank's risk-weighted assets, or 15% of cumulative profits for 2019 and 2020.
New ECB recommendations on bank dividends will be communicated in the last quarter of 2021.