Last week, the European Central Bank (ECB) decided not to extend beyond September 2021 its recommendation that all banks limit dividends, with its supervisors instead assessing the capital and distribution plans of each bank as part of the regular supervisory process.
The move comes on the back of improved macroeconomic projections that confirm the economic rebound and point to reduced uncertainty, which is improving the reliability of banks’ capital trajectories.
As a result, the bank said it is appropriate to reinstate the previous supervisory practice of discussing capital trajectories and dividend or share buy-back plans with each bank in the context of the normal supervisory cycle.
This normal cycle had been suspended in March 2020 as the COVID-19 pandemic gripped Europe, leading to wide-ranging restrictions in a number of areas.
That month, the ECB asked banks not to pay dividends with the aim of boosting their capacity to absorb losses and to support lending to households, small businesses and corporate bodies during the pandemic.
A similar recommendation was repeated in July, while in December the ECB recommended that banks limit their dividend payments. The same applied to share buy-backs.
The ECB stressed that the decision not to extend the dividend recommendations should not lead banks to underestimate the risks still present, saying that banks should remain prudent and carefully consider the sustainability of their business model.
“They should also not underestimate the risk that additional losses may later have an impact on their capital trajectory as support measures expire,” it said.
Describing the perspective to be adopted by its supervisors in their discussions with banks, the ECB said that when assessing a bank’s capital trajectory and its distribution plans, supervisors will take a forward-looking view duly informed by the results of the 2021 stress test.
Supervisors will also carefully consider the bank’s credit risk practices which may affect the credibility of its capital trajectory.
The ECB said that its supervisors will engage with banks over the summer as part of the regular supervisory dialogue.
The ECB also asked banks to adopt a prudent and forward-looking approach when deciding on remuneration policies, noting that it will continue to assess banks’ remuneration policies and the impact such policies may have on a bank’s ability to maintain a sound capital base.
The national competent authorities are expected to follow the same approach with the banks they directly supervise.
The recommendation on dividends remains applicable until 30th September 2021, meaning the next decisions to pay dividends should take place in the fourth quarter of 2021.
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