ECB Urged to Extend Bank Dividend Ban Six Months by Watchdog

(Bloomberg) -- Europe should extend its de-facto ban on bank dividends by six months, a top official at the European Central Bank’s supervisory arm said, casting a shadow over investors’ hopes for a return to payouts early next year.

The comments come as big banks across Europe are facing fraught times, with regulators at the ECB and the Bank of England preparing to decide in coming weeks whether and how to lift their recommendations on payouts. Shareholder dividends were effectively frozen in March in a trade-off for unprecedented regulatory relief and government loan guarantees, yet bankers have subsequently slammed them as doing more harm than good.

Read more: SocGen, Santander Denounce Dividend Ban as ECB Weighs Fallout

Speaking in an interview ahead of the long-awaited decision this month, Ed Sibley, a member of the ECB’s supervisory board, said continued uncertainty, a need to preserve capital for lending and reputational issues for banks all speak in favor of extending the regulator’s existing recommendation. The question is how to implement it in practice, because the ECB doesn’t have the powers to enforce a blanket ban over mounting objection by lenders.

“Overall, we would be better if we were to hold off for another six months,” said Sibley, who is also a deputy governor at the Central Bank of Ireland. “Whether we can practically do that is a real challenge.”

European banking stocks pared gains on Friday, with the 22-member Euro Stoxx Banks Index up 1.2% as of 5:28 p.m. in Frankfurt after earlier rising 2%. The index has fallen 19% this year with Banco de Sabadell SA, ABN Amro Bank NV and Societe Generale SA among the biggest losers.

The BOE and ECB have said they will announce their decisions on dividends by the end of the year. Sibley didn’t say how many supervisory board members share his views. “We’ve been having a really good discussion about it,” he said. “It’s not something we’ve been going at in a blasé kind of way.”

Regulators will get key input on Thursday when the ECB will release its economic projections, alongside its latest monetary policy decision. The BOE publishes its Financial Stability Report the next day.

“That will factor into our thinking, but there are lots of other things we need to think about as well,” said Sibley. “There are significant weaknesses in lots of banks’ ability to demonstrate to us that their planning is effective from a capital management perspective.”

Legal Basis

The ECB recommended earlier this year that banks not pay dividends or buy back shares at least through the end of 2020. The central bank can’t order an industry-wide ban, yet big banks fell in line after chief watchdog Andrea Enria said he could impose legally-binding measures on an individual basis.

As the pandemic progressed and lenders largely managed to deal with the fallout, some of the banks hardest-hit by the dividend suspension have become more vocal in demanding a return to payouts. Societe Generale Chairman Lorenzo Bini-Smaghi and his counterpart at Banco Santander SA, Ana Botin, have warned that the ban could backfire by making loans more expensive and even cutting banks off from funds provided by investors.

Sibley acknowledged that banks need to be able to pay dividends to access capital markets. Still, “some of the lobbying is a little tone deaf, especially with the level of fiscal and regulatory support that has gone into the economy,” he said.

Many banks have seen their share prices slump this year, especially when compared with the U.S., where the Federal Reserve only demanded a cap on capital returns.

‘Middle’ Ground

“We didn’t ban dividends, we expressed our view on them and I think that’s as far as we can go this time,” Sibley said. “You have to think about how would we implement something that is practical and will stand some degree of challenge. I think that’s where we’re having the debate.”

Several watchdogs and senior monetary policy officials favor allowing strong banks to resume payouts early next year, according to people familiar with the matter. ECB supervisory board members have discussed whether they can lift the ban just for the best-capitalized lenders without risking legal challenges from weaker ones, said the people, who asked not to be named because the deliberations are private. Capping dividends, potentially at 25% of a bank’s annual profit, is another option that’s been discussed, the people said.

A spokeswoman for the ECB declined to comment on those discussions.

Sibley said that taking such a case-by-case approach is complicated because it encourages banks to prioritize investors’ short-term interests over their longer-term financial health. It also risks disclosing non-public information about how the ECB views the governance failings of certain lenders, he said.

“That leads to another collective action problem or system-wide problem versus the individual incentive,” he said. “Overall, I think we’d be better off waiting. Practically, I don’t know how that’s going to be achievable so we’re going to have to come up with something that sits in the middle.”

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