ECB extends dividend ban, capital relief for euro zone
banks
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[July 28, 2020] FRANKFURT
(Reuters) - The European Central Bank extended on Tuesday a
recommendation to euro zone banks not to pay dividends until the end of
the year and allowed them to eat into their capital and liquidity
buffers for even longer, to help them cope with the economic fallout of
the coronavirus pandemic.
The ECB said banks could withstand a second wave of infections, but it
called on authorities to be ready to intervene and prevent a credit
crunch, possibly via recapitalisations.
The euro zone's top supervisor extended a ban on dividends and share
buybacks by three months until Jan. 1 and recommended that banks
"exercise extreme moderation" with bonuses.
It will review the decisions, which triggered immediate criticism from
some bankers, in the fourth quarter of the year.
The ECB also allowed them to breach their required liquidity buffer
until the end of next year and their total capital requirement for
another year.
"All our supervisory measures and actions are and will continue to be
aimed at ensuring that the banking sector can remain resilient and
support the economic recovery with an adequate supply of credit," the
ECB's chief supervisor, Andrea Enria, said in a blog post accompanying
the decisions.
Two German banking industry bodies complained the blanket dividend ban
did not take individual circumstances into account and risked unsettling
investors, making it more difficult for banks to seek capital.
But Marco Troiano, a director at Scope Ratings, said it was "the price
shareholders have to pay" for the ECB's largesse on capital and
liquidity and it provided extra security to creditors.
The ECB's announcement came the same day the Bank of England said it
would assess whether to extend a suspension on payouts such as dividends
and share buybacks by banks beyond the end of the year. Banks agreed in
March to suspend payouts this year.
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Andrea Enria, chairperson of the European Banking Authority, speaks
at Reuters Summit interview in London, Britain, September 25, 2017.
Picture taken September 25, 2017. REUTERS/Afolabi Sotunde
VULNERABILITY ANALYSIS
In a "vulnerability analysis", the ECB found that in its central economic
scenario, which assumes containment measures until mid-2021, banks would see
their aggregate Core Equity Tier 1 capital ratio depleted by approximately 1.9
percentage points to 12.6% by the end of 2022.
This was "well above" the threshold at which banks would be forced to skip
paying coupons on their Additional Tier 1 bonds, said Marc Stacey, a portfolio
manager at BlueBay Asset Management, adding the ECB's report was "upbeat" for
those creditors.
The ECB's severe scenario, which foresees a strong resurgence of coronavirus
infections, would wipe 5.7 percentage points off their capital to 8.8% over the
same period.
"There is clearly no room for complacency, but we can take some comfort," Enria
said. "This being said, the outcome of the exercise also indicates that
authorities must be ready to take additional action if the economic situation
further deteriorates."
In a conference call after the decision, Enria added that government could, if
the severe scenario came to pass, extend existing measures to support borrowers
but also introduce "asset relief schemes" or even recapitalise banks directly.
Undoing a decision taken at the height of the first wave of the outbreak in the
spring, the ECB decided to resume inspections at banks, starting in October, and
to follow up on remedial action that has already been agreed.
(Reporting By Francesco Canepa; editing by Larry King)
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