The European Central Bank (ECB) today extended its recommendation to banks on dividend distributions and share buy-backs until 1 January 2021 and asked banks to be extremely moderate with regard to variable remuneration.
According to the bank, this updated recommendation on dividend distributions remains temporary and exceptional and is aimed at preserving banks’ capacity to “absorb losses” and “support the economy” in this environment of exceptional uncertainty.
It said this uncertainty makes it difficult for banks to accurately forecast their capital positions. As demonstrated by the vulnerability analysis the level of capital in the system could decline significantly if a severe scenario were to materialise.
The ECB will review whether this stance remains necessary in the fourth quarter of 2020, taking into account the economic environment, the stability of the financial system and the reliability of capital planning.
The ECB is also encouraging banks to use their capital and liquidity buffers for lending purposes and loss absorption.
Andrea Enria, chair of the supervisory board, ECB said: “The build-up of strong capital and liquidity buffers since the last financial crisis has enabled banks during this crisis to continue lending to households and businesses, and thereby to help stabilise the real economy
“Therefore it is all the more important to encourage banks to use their capital and liquidity buffers now to continue focusing on this overarching task: lending, whilst of course maintaining sound underwriting standards. Meanwhile, and to support banks with their planning, we are signalling a gradual return to normal.”