ECB to lift cap on eurozone banks’ dividends and share buybacks

The European Central Bank’s head of supervision said it would lift its cap on dividends and share buybacks at eurozone banks, a vote of confidence in the sector’s resilience to the fallout from the coronavirus pandemic.

Andrea Enria told MEPs on Thursday that the ECB now had more clarity on the financial strength of eurozone banks and this meant that it was prepared to ease its remaining pandemic-related restrictions on their ability to distribute capital to investors.

“In the absence of materially adverse developments, we plan to repeal our recommendation as of the end of the third quarter of 2021 and return to reviewing dividends and share buybacks as part of our normal supervisory process, based on a careful forward-looking assessment of each bank’s individual capital planning,” Enria said.

The decision underlines how regulators are becoming less concerned about the risk that the pandemic and measures to contain it could produce a wave of bankruptcies and toxic loans that trigger another banking crisis.

Shares in eurozone banks have rebounded sharply in the past six months — the Euro Stoxx banks index has regained most of the 50 per cent drop it suffered after the Covid-19 crisis hit. After the ECB’s announcement on Thursday, shares in some of the biggest eurozone banks, including ING, UniCredit and Banco Santander were 2 per cent higher.

The shift by the ECB comes a week after the US Federal Reserve eased its restrictions on dividends and buybacks on American banks that it had imposed during the pandemic.

Enria said banks had “proven to be resilient so far”, adding that they had “robust capital positions and their profitability recovered in the second half of 2020 and the first quarter of 2021”. But he said there was still “some uncertainty about how the pandemic will evolve” and an uneven recovery across sectors and countries could yet weigh on bank balance sheets.

The European Banking Authority is due to announce the results of its latest stress test of EU lenders on July 30, when the ECB will release the results of a parallel exercise on 38 of the most significant eurozone banks.

Enria said supervisors expected “distribution plans to remain prudent and commensurate with banks’ internal capital generation capacity and with the potential impact of a deterioration in the quality of exposures, also under adverse scenarios”.

ECB president Christine Lagarde said the European Systemic Risk Board, which she also chairs, was likely to recommend lifting the cap on bank capital distributions. “The improved economic outlook on the back of rapid progress in vaccination campaigns has reduced the probability of severe scenarios,” she said.

When the pandemic hit Europe last year, the ECB ordered eurozone banks to stop all dividends and share buybacks to conserve €30bn of capital.

Since the start of this year, eurozone banks have been allowed to restart capital distributions subject to a cap of up to 15 per cent of their past two years of profits and no higher than 0.2 per cent of their common equity tier one capital ratio.

The Bank of England has imposed a similar cap on dividends and buybacks by British banks and its Prudential Regulation Authority said it would allow lenders to accrue but not pay out “appropriately prudent” 2021 dividends while promising a further update in July.

Additional reporting by Stephen Morris in London

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