LAST UPDATE 11:10
With a new message, EKT asks the banks not to distribute dividends until September 2021.
“Banks need to be extremely prudent with dividends and own stock purchases,” she said in a statement.
To this end, the ECB urges all banks to consider not distributing dividends or buying own shares or restricting such movements until 30 September 2021.
The system also captures an assessment of the stability of the financial system and this was done in close cooperation with the European Systemic Risk Council.
Given the continuing uncertainty about the financial implications of the coronavirus, the ECB expects dividends and equity purchases to remain below 15% of total earnings for the fiscal year 2019-2020 and not higher than 20 basis points on the capital adequacy ratio, whichever are lower.
Banks planning to pay a dividend or buy their own shares must be profitable and have strong capital.
They are expected to contact the Joint Supervisory Team to discuss whether the level of distribution they are planning is prudent.
Banks should also refrain from distributing dividends from their 2021 profits.
The ECB emphasizes that the previous recommendation for a temporary suspension of all dividends and the purchase of own shares on March 27, and its subsequent extension on July 28, reflect the exceptional and difficult conditions faced by the economy in 2020.
In revising its recommendation, the ECB acknowledges the reduced uncertainty in macroeconomic forecasts. Despite the ongoing challenges, the revised estimates are close to the central scenario used in the ECB vulnerability analysis conducted in the first half of the year, which confirmed the resilience of the European banking industry.
The revised recommendation aims to ensure the ability of banks to absorb losses and lend to support the economy.
Continued prudent approach is needed, as the impact of the pandemic on banks’ balance sheets has not been fully manifested at a time when banks are still benefiting from various support measures and considering that credit impairments come with a time lag.
The recommendation is related to the current exceptional conditions and will remain strong until the end of September 2021.
Then, in the absence of significant adverse developments, the ECB intends to repeal the recommendation and return to the banks’ capital and distribution capital ratings plans, based on the outcome of the normal supervisory cycle.
Banks will continue to use the cushions for their capital and liquidity, for loan absorption and lending purposes.
The ECB will not require banks to start replenishing their capital before the capital reduction peaks.