ECB orders banks to freeze dividends and share buybacks

The European Central Bank has ordered eurozone banks to freeze dividends and share buybacks this year in an escalation of its efforts to prevent the coronavirus from triggering a credit crisis in Europe.

The move is expected to result in the cancellation or postponement of several of the region’s largest banks in order to return billions of euros of excess capital to investors.

The ECB has declared that the banks “should not pay dividends for the 2019 and 2020 financial years before October 1, 2020 at least”. He added that they should “refrain from share buybacks aimed at compensating shareholders”.

The freeze on the distribution of capital to investors was aimed at “increasing the ability of banks to absorb losses and support lending to households, small businesses and businesses during the coronavirus pandemic (Covid-19),” said the BCE.

Andrea Enria, President of the ECB Supervisory Board, said the banks would save 30 billion euros they would have paid in dividends. “As everything around us is suspended to focus all of our communities’ efforts on the fight against the coronavirus, a contribution is also required from banks and their shareholders,” said Enria in a blog article.

While central bankers are convinced that the banking system is in much better shape than the 2008 financial crisis, they fear that the impending economic slowdown will be amplified if lenders withdraw from loans to businesses and households.

With economists predicting that the eurozone will experience an even deeper recession than the one that followed the 2008 financial crash, regulators want banks to keep as much of their balance sheets free to absorb a likely increase in borrower defaults .

The ECB has already eased capital requirements for the sector – providing around € 120 billion in capital relief that could finance € 1.8 billion in new loans – as part of a package of measures to contain the fallout from the coronavirus pandemic, which includes very low cost loans to lenders.

When he announced the first package two weeks ago, he said banks should use additional capital relief “to support the economy, not to increase dividend distributions or variable compensation”.

Additional capital relief is unlikely to be used for new loans, according to a senior ECB official, but it will be necessary to prevent banks from reducing their loan portfolio once the expected economic downturn forces them to invest more capital in existing loans.

The central bank said its latest decision would not “retroactively” cancel the dividends already paid by the banks for 2019, but it said that any resolution on the planned dividend payments to be voted by shareholders should be changed to delay payments.

The ECB decision, which was announced on Friday evening, came after central bank governors and regulators who oversee the Basel Committee said they would postpone the new capital requirements for a year banks to allow lenders to focus on responding to the coronavirus crisis. .

Earlier this week, the European Banking Federation recommended banks freeze dividends and share buybacks in a letter to the ECB’s single supervisory mechanism, which oversees the 117 largest banks in the euro area.

Pressure on bank balance sheets has increased in the past three weeks, with more than 130 companies in Europe and America drawing at least $ 124.1 billion from their lenders, according to analysis by the Financial Times and people in the know. the activity.

The Norwegian financial regulator has already asked the government to ban banks and insurers from paying dividends until further notice, following a similar decision by the Swedish authorities.

Banco Santander of Spain has so far been the only European lender to defer its interim dividend. Ana Botín, its president, also donated 50% of her salary to a fund to pay for the medical equipment set up by the Spanish bank.

Earlier this month, eight of the largest US banks – including JPMorgan, Bank of America and Citigroup – said they were suspending their multibillion-dollar share buyback programs until at least July, citing the “unprecedented challenge” of the pandemic.

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