Bank dividend suspension proved effective – ECB

Lenders that reduced distributions increased both provisions and lending to the real economy

The European Central Bank recommendation for banks to suspend the distribution of profits during the pandemic proved effective, said the supervisor today (August 18).

Analysis suggests “banks that altered their dividend distribution plans increased provisions by 5.5% and lending to the real economy by 2.4% relative to banks that left their distribution plans unchanged”, said the ECB. Some banks had already made dividend payments, or already had no plans to make a payout.

ECB Banking Supervision introduced the dividend suspension in March 2020 in a bid to reinforce banks’ capacity to absorb losses and maintain lending to business and households during the crisis. In December, it eased the rules, limiting banks to a maximum payout of 15% of profits. The limits expire at the end of September.

The supervisor estimates that due to its approach to dividends, banks kept €28 billion ($32.8 billion) on their books in 2020. In the first months of 2021, banks in the eurozone distributed dividends worth €10 billion. This is less than one-third of normal levels, according to the ECB.

As uncertainty has “gradually decreased” and the economic outlook has “improved”, the ECB decided in July to return to pre-pandemic supervisory practices and approach dividend distributions on a case-by-case basis.

Nonetheless, the supervisor warned banks to “remain vigilant, as the crisis continues to present challenges for their balance sheets and capital positions”. Banks should focus on long-term risks regarding default in the sectors more affected by the pandemic when assessing credit loss provision, it said.

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