Tight framework: ECB allows banks to return dividends

Tuesday, December 15, 2020

Tight frame
ECB allows banks to return dividends

In order to keep the financial system stable during the Corona crisis, the ECB prohibits financial institutions from paying dividends to shareholders. But now the bankers are loosening the rules. However, financial institutions must continue to observe strict rules before they can please investors.

In view of the second wave of pandemics, the ECB banking supervisory authority is only allowing banks in the euro area to distribute dividends to their shareholders to a limited extent. The institutions should either pay no dividends or only to a limited extent or buy back shares by the end of September 2021, recommended the ECB banking supervisory authority in Frankfurt. Distributions or buybacks should not make up more than 15 percent of the combined profits for 2019 and 2020. In addition, these should not exceed 0.2 percentage points of the respective Common Equity Tier 1 capital ratio (CET1).

"The revised recommendation is intended to ensure the banks' ability to absorb losses and support lending to the economy," the supervisors said. In the past few months, banks had raged against the dividend freeze imposed by the European Central Bank (ECB) in the spring and warned against an extension of the distribution ban.

According to the ECB, financial institutions that want to pay dividends to their shareholders or buy back shares must also be profitable and have robust capital development. You should contact your bank guardian. Then it should be considered whether the amount of the planned distribution is also prudent. The consequences of the virus pandemic have not yet been fully reflected in the bank balance sheets. Because institutes still benefited from government support measures.

BaFin warns banks

The German financial regulator BaFin welcomed the decision of the ECB. "Advising the institutes to continue to deal very restrictively with distributions is the right approach," said BaFin boss Felix Hufeld. He expects increased loan defaults due to the pandemic. Institutions should therefore hold as much capital as possible. This also applies to the smaller German financial institutions.

In view of the corona crisis, the ECB recommended a dividend freeze until October 1 in March and then extended this to January 1 in July. The euro central bank has been responsible for overseeing the major banks in the currency area since autumn 2014. It now controls 113 financial institutions, including Deutsche Bank and Commerzbank in Germany. The supervision of the smaller institutions lies primarily with the national authorities.

Last week, the British central bank had allowed the country's banks to distribute dividends again. However, the Bank of England also set limits. The dividends should not exceed a quarter of the profit for 2019 and 2020.