Europe Finds There’s No Easy Way Out of Ban on Bank Dividends

(Bloomberg) — European bankers are hoping months of badgering regulators will pay off just in time for the holidays, with the freedom to pay dividends again.


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Supervisors in Frankfurt and London are set to decide in coming weeks whether the institutions are strong enough to withstand further Covid shocks — and hold a conservative line on bonuses — without more taxpayer assistance.

Payouts to bank shareholders were frozen in March in a trade-off for unprecedented regulatory relief and government loan guarantees. The policy makers’ response to the initial market shock contained the economic damage from the pandemic but has since stoked frustrations among finance titans who saw their shares lag.

“The issue is how to make the banking system investable,” Lorenzo Bini Smaghi, chairman of Societe Generale SA and a former European Central Bank executive board member, said at a conference on Wednesday. “If there is a real crisis and you need private capital, then there will not be sufficient capital in the system to support the economy. Where will the capital come from? It will have to come from taxpayers.”

chart, histogram: Record Strength

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Record Strength

The ECB has said its de facto ban kept about 30 billion euros ($36 billion) in the banking system that otherwise would have gone to investors. Here are the options that the ECB and Bank of England could opt for in December.

Extend the dividend freeze

This would be a major disappointment for investors.

“Extending the ban isn’t sustainable, it’s a lockdown applied to finance,” said Romain Boscher, who oversees $191 billion as global chief investment officer for equities at Fidelity International. “Asking shareholders to bear the risk without a dividend is an implicit nationalization.”

But the economy is still too fragile, some supervisors say. They point to the companies and consumers who were allowed to suspend repayments on $1 trillion of loans earlier this year. There’s also concern that allowing strong banks to pay dividends could stigmatize weaker ones.

Lift the ban entirely

The watchdogs could return to the pre-crisis approach and allow banks to pay dividends if they exceed their capital requirements. That could mean large payouts because many lenders have built up cushions since the 2008 crash. Still, it may be unpalatable given lenders’ record capital levels at the close of the third quarter were buoyed by the regulatory relief and government support.

ECB Supervisory Board member Kerstin af Jochnick pointed to the many uncertainties that could undermine this approach.

“We are now going through another difficult phase of the crisis with more infections and related public interventions increasing. But at the same time I think there are also more positive signals now on the vaccine and how our economies will be able to recover,” she said at a conference on Wednesday. “The situation is rather difficult to really assess and what will be the effect on banks’ balance sheets.”

Limit payouts

The ECB’s supervisory board has discussed limiting dividends to a percentage of annual net income, people familiar with the matter said last month. That would keep capital in the system while allowing for some payouts. It could also lessen competitive pressures on banks. Still, it’s unclear whether it’s feasible from a legal standpoint.

“Capping dividends would also be very unfair to those banks with rock solid capital levels,” said Fidelity’s Boscher.

diagram: Surplus Funds

© Bloomberg
Surplus Funds

Wait for stress tests

Regulators could pledge to allow banks to pay dividends next year, depending on how they fare in stress tests. The European Union’s next such exam will start in January with results at the end of July. That would be a more transparent process, but it also means a wait for investors. The EU stress test has also been criticized previously as being too easy for banks to game.

BOE-ECB split

The two central banks could take different routes. Whichever pursues the more hawkish route would leave its banks at a disadvantage to international peers.

Earlier this year, the U.S. opted for the more pragmatic option of capping bank payouts while Switzerland asked banks to split them over two payments spread over 2020.

Whatever the outcome, regulators have been at pains to stress that the ban was an exceptional measure and won’t become part of their toolbox.

“It’s temporary,” ECB Vice President Luis de Guindos said. “It will depend mainly on the evolution and the projections with respect to the evolution of the economy. What we want to do is avoid credit crunch and to maintain the flow of credit to the real economy.”

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