ECB orders banks to freeze dividends and share buybacks

Move likely to affect payments from AIB and Bank of Ireland to State

ECB headquarters in Frankfurt, Germany. The regulator has already relaxed capital requirements for euro zone banks. Photograph: Getty

ECB headquarters in Frankfurt, Germany. The regulator has already relaxed capital requirements for euro zone banks. Photograph: Getty

 

The European Central Bank has ordered euro zone banks to freeze dividend payments and share buybacks this year in an escalation of its efforts to avoid coronavirus triggering a credit crunch in Europe.

The move is expected to result in many of the region’s largest banks either cancelling or delaying plans to return billions of euros of excess capital to investors.

In the case of Irish banks, it would see payments from AIB and Bank of Ireland to the State being suspended.

The ECB said banks “should not pay dividends for the financial years 2019 and 2020 until at least 1 October 2020”. It added that they should “refrain from share buybacks aimed at remunerating shareholders”.

The freeze on distributing capital to investors was to “boost banks’ capacity to absorb losses and support lending to households, small businesses and corporates during the coronavirus (Covid-19) pandemic,” the ECB said.

Andrea Enria, chair of the ECB’s supervisory board, said the banks would save €30 billion that they would have paid out in dividends. “As everything around us is being put on hold to focus all the efforts of our communities on the fight against the coronavirus, a contribution is also required from banks and their shareholders,” said Mr Enria in a blog post.

While central bankers are confident that the banking system is in much better shape than the 2008 financial crisis, they are worried that the imminent economic downturn could be amplified if lenders pull back from lending to businesses and households.

Forecasts

With economists forecasting that the euro zone is likely to suffer an even deeper recession than the one that followed the 2008 financial crash, regulators are keen for banks to keep as much of their balance sheets free to absorb a likely surge in borrower defaults.

The ECB has already relaxed capital requirements for the sector – providing an estimated €120 billion of capital relief that could fund €1.8 trillion of new loans – as part of a package of measures to contain the fallout from the coronavirus pandemic that includes ultra-cheap loans for lenders.

When it announced the first set of measures two weeks ago, it said banks should use the extra capital relief “to support the economy and not to increase dividend distributions or variable remuneration”. – Copyright The Financial Times Limited 2020