The European Central Bank has instructed the eurozone banks to freeze dividend payments and share buybacks this year to escalate their efforts to avoid corona viruses that are causing a credit crunch in Europe.
The move is expected to result in many of the region’s largest banks either canceling or delaying plans to return billions of excess capital to investors.
The ECB said banks should “only pay dividends for the 2019 and 2020 financial years from October 1, 2020”. She added that “they shouldn’t make share buybacks to compensate shareholders.”
Freezing capital distribution to investors should “strengthen banks’ ability to offset losses and support lending to households, small businesses, and businesses during the coronavirus pandemic (Covid-19),” the ECB said.
Andrea Enria, chairman of the ECB’s supervisory board, said the banks would save EUR 30 billion that they would have paid out as dividends. “As everything around us is put on hold to focus all of our communities’ efforts to fight the corona virus, a contribution from banks and their shareholders is also required,” Enria said in a blog post.
While central bankers are confident that the banking system is in much better shape than the 2008 financial crisis, they fear that the impending economic downturn may worsen as lenders withdraw from corporate and household lending.
Given economists’ forecasts that the eurozone is likely to experience an even deeper recession than after the 2008 financial crash, regulators are striving to ensure that banks keep as much of their balance sheets free as possible to offset a likely increase in borrower defaults.
The ECB has already eased capital requirements for the sector – with an estimated EUR 120 billion capital relief that could fund EUR 1.8 billion in new loans – as part of a package of measures to contain the consequences of the coronavirus pandemic, the Ultra-cheap credit covers for lenders.
When it announced the first measures two weeks ago, they said banks should use the additional capital relief to “support the economy and not increase dividend payments or variable compensation”.
According to a senior ECB official, the additional capital relief is unlikely to be used for new loans. However, it will be needed to prevent banks from shrinking their loan books when an expected economic downturn forces them to provide more capital for existing loans.
The central bank said its recent decision would not “retroactively cancel dividends that banks had already paid out for 2019,” but it said that any proposed dividend payment decisions that shareholders should vote on should be changed to reflect the payouts to delay.
The ECB’s move, announced on Friday evening, came after central bank governors and regulators overseeing the Basel Committee announced that they would postpone banks’ stringent new capital requirements by a year so that lenders could focus on responding to the coronavirus crisis.
Earlier this week, the European Federation of Banks recommended that banks freeze dividend payments and buy back shares a letter to the ECB’s single supervisory mechanism, which monitors the 117 largest banks in the euro area.
Bank balances have increased in the past three weeks as more than 130 companies in Europe and America have drawn at least $ 124.1 billion from their lenders an analysis by the Financial Times and people who have been informed about the activity.
The Norwegian financial regulator has already requested that the government prohibit banks and insurers from paying dividends until further notice after a similar move by the Swedish regulator.
The Spanish Banco Santander is so far the only European lender to postpone its interim dividend. Ana Botín, her chairperson, also personally donated 50 percent 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 would suspend their multi-billion dollar share buyback programs until at least July, citing the “unprecedented challenge” of the pandemic.