ECB extends dividend ban, capital relief for euro zone banks

Reuters reports that the European Central Bank extended on Tuesday a recommendation to euro zone banks not to pay dividends until the end of the year and allowed them to eat into their capital and liquidity buffers for even longer, to help them cope with the economic fallout of the coronavirus pandemic.

The ECB said banks could withstand a second wave of infections, but it called on authorities to be ready to intervene and prevent a credit crunch, possibly including recapitalisations.

The euro zone’s top supervisor extended a ban on dividends and share buybacks by two months until Jan. 1 and recommended that banks “exercise extreme moderation” with bonuses. It will review the decisions in the fourth quarter of the year.

It also allowed them to breach their required liquidity buffer until the end of next year and their total capital requirement for another year.

“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 accompanying the decisions.

The ECB’s announcement came the same day the Bank of England said it would assess whether to extend a suspension on payouts such as dividends and share buybacks by banks beyond the end of the year. Banks agreed in March to suspend payouts this year.

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.