On 28 July 2020, the ECB extended its recommendation that banks suspend the distribution of dividends and share buybacks until 1 January 2021 and, in addition, requested banks to be extremely moderate with regard to variable remuneration.
First issued in March 2020 in response to the COVID-19 pandemic, the updated recommendation remains temporary and is aimed at preserving banks’ capacity to absorb losses and support the economy in an environment of major uncertainty. While not legally binding, the ECB recommendation will most likely be followed by most, if not all, banks to which it applies and several national regulators have updated their own requests to such banks in their own jurisdictions in light of the ECB's updated recommendation.
The recommendation is primarily directed at significant entities that are subject to the ECB’s direct supervision (114 as of 1 July 2020). However, the ECB ealso xpects national competent authorities to enforce its recommendation on less significant entities and groups as they deem appropriate. While some national watchdogs have already done so, some of them, including the German Federal Financial Supervisory Authority, have informally indicated that they will tolerate dividend payments by smaller banks if they are well capitalised and sufficiently profitable.
The ECB will review whether its stance remains necessary in the fourth quarter of 2020. Should the uncertainty that has necessitated the ECB recommendation subside, banks with sustainable capital positions will be allowed to resume dividend payments. The ECB stresses that this will also apply if they are operating below the Pillar 2 Guidance capital level. Approving investor pay-outs again might also be a catalyst for M&A activity in the banking sector and thereby promote its consolidation. Earlier in summer 2020, the ECB made clear that it would welcome a certain degree of consolidation in the banking sector, given this could help address structural challenges that European banks are currently confronting.
Beside the dividend and share buy-back recommendation, the ECB also issued a letter to banks asking them to take a very conservative stance on variable remuneration payments. While the ECB acknowledges that this may not be possible for all banks, it expects banks to defer a larger part of such variable remuneration and consider payments in instruments rather than in cash where possible to do so.
Further Information on the ECB's recommendation and ist letter to banks is available at: https://www.bankingsupervision.europa.eu/press/pr/date/2020/html/ssm.pr200728_1~42a74a0b86.en.html