ECB Asks European Banks To Hold Off On 2020 Dividends

By Joanne Faulkner
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Law360, London (March 27, 2020, 1:16 PM GMT) -- The European Central Bank on Friday told banks not to pay out dividends until at least October and avoid launching share buyback programs to preserve capital to lend during the coronavirus pandemic.

The ECB said lenders should hold off on paying out dividends for the 2019 and 2020 financial years so that they'll be able to handle losses and help consumers and businesses during the crisis.

While the latest recommendation from the central bank won't end dividends that banks have already paid for 2019, any financial institutions who have put a distribution plan to shareholders for an upcoming meeting should revise the proposal. 

The announcement came late Friday after the European Banking Federation said that banks should not pay dividends to shareholders for the 2020 financial year or begin share buybaks.

The industry group said listed banks should not accrue dividends or undertake share buybacks for all of 2020 in order to "maintain maximum capital preservation," in a letter sent to European Central Bank chairman Andrea Enria.

The EBF said the bloc's banking sector remains fully committed to helping businesses and households cope with the fallout from COVID-19 and it would prioritize solvency in order to be able to fund the economy.

"It is the strong view of EBF that any decisions by a listed bank to withhold its 2019 dividends at this stage needs to take into account the perception of investors about the solvency of the European banking sector and the expectations of shareholders," the trade body said.

Most banks acknowledge paying 2020 dividends may be unlikely, the EBF said.

Where 2019 dividend distributions and share buybacks have not yet been voted by shareholders, some banks could decide that part or the full amount be assigned to reserves, until there is better visibility as to the effects of the crisis, at which point they could be distributed to shareholders, the EBF added.

The move by the body — which represents the European banking sector — comes after the European Central Bank said it would relax capital requirements to encourage lending and offset the impact the coronavirus scare was having on the economy.

The ECB said it will allow banks to allocate less money to capital buffers than they are required to under the EU's Pillar 2 framework, which ensures that banks have enough cash to address risks.

Banks also will be allowed to use assets that are not classified as common equity Tier 1 — a group reserved for the highest-quality assets, such as shares — to meet their reduced Pillar 2 requirement.

The ECB is also allowing banks to put less cash into the capital conservation buffer, which ensures that lenders build up their capital holdings outside of times of stress, and the liquidity coverage ratio — which forces them to hold an amount of liquid assets enough to fund cash outflows for 30 days.

A number of other regulators have also told banks to prioritize shoring up their balance sheets. Sweden's financial watchdog told its lenders on Tuesday to scrap dividend payments to shareholders so they can channel money into households and businesses during the coronavirus crisis.

--Additional reporting by Najiyya Budaly. Editing by Rebecca Flanagan.

Update: This story has been updated to reflect the ECB's latest recommendations.

For a reprint of this article, please contact reprints@law360.com.

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