ECB asks banks not to pay dividends until January 2021

The Eurozone’s top supervisor clarifies timeline to restore buffers

The European Central Bank extended on Tuesday a recommendation to Eurozone’s banks not to pay dividends or buy back own shares until January to face the coronavirus crisis, news wires reported. The top supervisor asks banks to be extremely moderate with regard to variable remuneration.

The recommendation, which extends a previous call to halt such payments until at least October 2020, "remains temporary and exceptional", the ECB said in a statement. The aim is to preserve "banks' capacity to absorb losses and support lending to the real economy" at a time of "exceptional uncertainty".

The ECB has taken unprecedented action to cushion the economic impact from the pandemic, launching a €1.3 trillion emergency bond-buying scheme to stimulate growth and keep borrowing costs low.

The ECB said banks could withstand a second wave of coronavirus infections, but it called on authorities to be ready to intervene and prevent a credit crunch, possibly including recapitalisations. “All our supervisory measures and actions are and will continue to be aimed at ensuring that the banking sector can remain resilient and support the economic recovery with an adequate supply of credit,” the ECB’s chief supervisor, Andrea Enria, said in a blog post.

The ECB also expects lenders to show "extreme moderation" in deciding the variable component of bankers' salaries, Enria said.

In a “vulnerability analysis”, the ECB found that in its central economic scenario, which assumes containment measures until mid-2021, banks would see their aggregate Core Equity Tier 1 capital ratio depleted by approximately 1.9 percentage points to 12.6% by the end of 2022. The severe scenario, which foresees a strong resurgence of infections, would wipe 5.7 percentage points off their capital to 8.8% over the same period. “There is clearly no room for complacency, but we can take some comfort,” Enria said. “This being said, the outcome of the exercise also indicates that authorities must be ready to take additional action if the economic situation further deteriorates.”

In a conference call after the decision, Enria added that government could, if the severe scenario came to pass, extend existing measures to support borrowers but also introduce “asset relief schemes” or even recapitalise banks directly.

More on this subject: Coronavirus

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