According to the will of the European banking supervisory authorities, banks should waive dividends and share buybacks by January 1, 2021. This is intended to strengthen the ability of the banks in the corona pandemic to cope with possible losses and to have sufficient funds for lending to private individuals and companies.
“The build-up of strong capital and liquidity buffers since the last financial crisis has enabled banks in this crisis to continue to lend to households and businesses, thereby helping to stabilize the real economy,” said the head of banking supervision at the European Central Bank (ECB). , Andrea Enria, the recommendation. “It is all the more important to encourage banks to use their capital and liquidity buffers now to continue to focus on this overarching task: lending.”
So far, the ECB had appealed to banks not to pay dividends to their shareholders at least until October 1 of this year. As a result, many banks canceled planned profit distributions for the 2019 financial year or at least reduced them.
The ECB has been overseeing the largest banks and banking groups in the euro area directly since November 2014. Currently there are 115 institutions in the common currency area, which represent almost 82 percent of the market in the currency area of the 19 countries.
Banking sector well prepared for crisis so far
The ECB currently sees Europe’s banks adequately equipped against setbacks in the corona crisis. If the economic environment should deteriorate significantly, the capital buffers of the institutes would melt “considerably”, according to an analysis.
In such a case, the authorities should be ready to take further measures “to prevent simultaneous deleveraging by banks that could deepen the recession,” said Enria, chief banking officer.
The regulators used two scenarios to investigate how the capital buffers of 86 institutions in the euro area, which are directly supervised by the ECB, would react. In the first calculation, which the ECB believes is more likely, the central bank expects economic output in the currency area to decline by 8.7 percent in the current year.
In the second case, a deeper fall of 12.6 percent is assumed. In both scenarios, the ECB expects the economy to return to growth in 2021 – albeit at different speeds.
Depending on the severity of the economic crisis, the core capital ratio (CET1) of the banks would drop from an initial value of 14.5 percent by 1.9 and 5.7 percentage points. In the latter case, several institutions would have to take measures to meet the minimum capital requirements of the supervisors.