Update on recommendation on dividend payments and share buybacks
On 27th July, the ECB updated its March recommendation on dividend payments and share buybacks, extending until 1st January 2021 (from 30th October 2020) (i) the suspension of dividend payments and commitments to pay out dividends for financial years 2019 and 2020 and (ii) share buybacks to remunerate shareholders. The ECB notes that while this measure is of a temporary nature, warranted by the exceptional circumstances of the Covid-19 pandemic, that it intends to decide in the 4th quarter of 2020 on the approach to be followed after 1st January 2021. When making a decision on whether to further extend the dividend prohibition or not, the ECB will take into account the economic environment, the stability of the financial system and the level of certainty around capital planning. The timing of 1st 2021 is consistent with the PRA’s March statement on dividend payment and share buyback restrictions. As regards the possibility of banks being able to re-start dividend payments after this date, the PRA notes in its announcement (noting the updated ECB recommendation) on 28th July that it will undertake an assessment of firm’s distribution plans beyond the end of 2020 in the 4th quarter of 2020. The decision will be based on the current and projected capital position of the banks and will take into account the uncertain economic outlook, market conditions and capital trajectories.
As regards payment of bonuses, the ECB issued a letter to banks asking them to be “extremely moderate” with regard to variable remuneration payments, for example by reducing the overall amount of variable pay. Where this is not possible, banks should defer a larger part of variable remuneration and consider payments in the form of instruments (e.g. shares).
The ECB gave further guidance on the timing of rebuilding of capital and liquidity buffers. The ECB as well as the PRA and other regulators have all endorsed the use of capital and liquidity buffers by banks to support lending and loss absorption during the Covid-19 pandemic. The ECB clarified that it will not require banks to start replenishing their capital buffers before the “peak in capital depletion” is reached. The exact timeline will be decided following the 2021 EU-wide stress test. The ECB commits to allowing banks to operate below their Pillar 2 Guidance and their combined buffer requirement until at least the end of 2022 and below their LCR until at least the end of 2021, without automatically triggering supervisory actions. This timing guidance should give banks comfort that they have a sufficient period of time to rebuild their capital and liquidity buffers.