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Law360, London (December 16, 2020, 11:15 AM GMT ) European banking regulators have urged lenders to hold off from paying out cash dividends or taking part in share buy-backs until September 2021 in an attempt to keep cash in the banking system as the COVID-19 crisis continues to batter economies.
Lenders should at least exercise "extreme prudence" and limit such payouts, the European Central Bank said on Tuesday. The call was echoed by the European Banking Authority, which said on the same day that banks should not make payouts to shareholders.
"Even with the improvement in macroeconomic conditions and the reduction of economic uncertainty due to the COVID-19 pandemic since March 2020, the level of uncertainty remains elevated, with a continued impact on banks' ability to forecast their medium-term capital needs," the central bank said in a letter to chief executives.
"Consequently, credit institutions are still expected to primarily focus on maintaining a suitable amount of capital to absorb potential losses and to support the real economy by providing credit to households, small businesses and corporates," the ECB added.
The ECB said it expects dividends and share buy-backs to remain below 15% of profit. Banks that do plan to pay dividends must "be profitable and have robust capital trajectories."
Lenders should contact their regulators to discuss whether they can pay dividends, the central bank said. It said the priority should be making sure that banks can continue to absorb losses and lend cash to support the economy.
Banks are still being buoyed by government support measures introduced in the wake of the crisis, the ECB said. It added that credit crises usually have a time lag — so banks should be aware that the worst effects of the pandemic may not have shown up on their balance sheets yet.
The ECB also instructed banks to exercise "extreme moderation" when it comes to paying salaries linked to performance or bonuses for staff.
The European Banking Authority also said that lenders should hold off from participating in activities that draw cash out of the banking system unless they exercise "extreme caution."
"Given that the COVID-19 crisis and the uncertainty on its impact on the economy are likely to continue, with possible further deterioration of asset quality metrics over the next quarters, the EBA urges banks to refrain from distributing capital outside the banking system," the watchdog said.
The authority warned banks that are considering paying dividends to carefully consider the effect this might have on their capital positions. The EBA did not specify how long banks should continue to refrain from paying dividends.
The ECB extended existing guidance urging banks to pause dividend payments in July. At the time it said that financial institutions should maintain the moratorium until January 2021. The central bank began relaxing capital requirements in March to ensure that banks have sufficient cash to withstand the economic fallout of the pandemic.
--Additional reporting by Najiyya Budaly. Editing by Ed Harris.
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