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ECB Lets Banks Resume Dividends, Buybacks as Outlook Improves

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The European Central Bank (“ECB”) has decided to ease restrictions on banks by allowing them to share part of their cumulated 2019-2020 profits with stockholders by paying out dividends and resuming buybacks. Given the improvement in economic outlook, the regulator is allowing the healthy banks that have enough capital to make small payouts, while remaining prudent in their decisions.

The ECB said in a statement “Banks that intend to pay dividends or buy back shares need to be profitable and have robust capital trajectories.”

The ECB expects bank distributions to either remain below 15% of the combined profit for 2019 and 2020 or 20 basis points of the Common Equity Tier 1 ratio, whichever is lower. Banks have been asked to contact their Joint Supervisory Team to discuss whether the level of intended distribution is prudent or not.

Notably, in March, the ECB had asked banks to temporarily suspend any kind of shareholder distributions until at least October and use the additional capital to support the economy hurt by the coronavirus pandemic. In July, the ban was extended up until January 2021.

Paying heed to the ECB’s demand, several Euro-zone banks, including UniCredit S.p.A., ABN Amro Bank N.V., Societe Generale (SCGLY - Free Report) , Commerzbank AG and ING Groep N.V. (ING - Free Report) had stopped dividend payments and suspend buybacks this year. But UBS Group AG (UBS - Free Report) and Credit Suisse (CS - Free Report) had planned to move ahead with their outstanding 2019 dividend payments.

Although the euro zone is still battling with the second wave of the virus, the overall economic outlook now seems bright on rising investor optimism and favorable developments related to the vaccine. In fact, the ECB projects the euro zone’s economy to rebound by 3.9% in 2021 and 4.2% in 2022.

While the ECB’s current allowance is valid until September 2021, it requests banks to use “extreme moderation” with bonuses.

The ECB stated, “The revised recommendation aims to safeguard banks’ capacity to absorb losses and lend to support the economy.”

Similar Move by UK Regulators

Last week, regulators in the U.K. permitted the resumption of shareholder distributions that were suspended in March after the Prudential Regulatory Authority (“PRA”) asked banks to pause dividend payments for this year and temporarily suspend buybacks. Back then, the move was taken to preserve liquidity against unexpected losses from the economic slowdown resulting from the pandemic.

However, now, six major banks — HSBC Holdings, Barclays, Lloyds Banking Group, NatWest, Santander UK and Standard Chartered — are expected to resume shareholder distributions early next year.

The PRA decided that “an extension of the exceptional and precautionary action taken in March is not necessary” and banks can restart some distributions with the approval of the board of directors, “within an appropriately prudent framework.”

Is Good News in Store for U.S. Banks as Well?

Currently, in the United States, share buybacks for big banks have been restricted until the end of this year. Also, their dividends have been capped and are based on the formula related to their recent income. Under this restriction, banks are not allowed to pay dividends more than their average quarterly profit from the four most recent quarters.

These restrictions have been imposed on 33 banks with more than $100 billion in assets like JPMorgan, Citigroup, Wells Fargo, Bank of America and others.

In June, the Federal Reserve had released the results of the Dodd-Frank Act supervisory stress test 2020 (DFAST 2020), which, to a great extent, reflected the stability of the banking system. However, on the uncertainty signaled by the industry and the broader economy, the central bank had announced a second round of stress tests for big banks.

The second round will be based on two coronavirus-related recession scenarios for which the results will be announced this month. Depending on the results, the Fed will either allow or continue to restrict shareholder payouts by the big U.S. banks.

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