The European Central Bank said lenders should refrain from paying dividends and buying back shares until next year, suggesting several would face a capital shortfall if the eurozone economy deteriorated further.
The ECB, which supervises the largest banks in the eurozone, extended its previous recommendation for a moratorium on dividends and buybacks until January 2021 from October 2020.
It also asked banks to moderate the payment of bonuses and consider alternatives to cash payments, such as shares. It said it would review its position in December.
Europe’s banks, already suffering under negative interest rates, high competition and bad loans inherited from the sovereign-debt crisis, are expected to see credit losses mount again as borrowers, including companies hit hard by the coronavirus pandemic, struggle to repay their debts. Some of the continent’s largest lenders, including Deutsche Bank and Banco Santander, are set to report second-quarter earnings this week.
The ECB had previously told banks not to pay dividends until October so they could continue lending and more easily absorb losses from souring loans.
Tuesday’s decision comes as an analysis the ECB conducted found that while the sector could withstand a sharp recession this year followed by growth in 2021 and 2022, several banks would face capital shortfalls if the contraction were deeper.
Under a most likely scenario, the euro-area economy would contract 8.7% this year, followed by growth of 5.2% and 3.3% in 2021 and 2022, respectively, according to the analysis.
Under a more severe case, which the ECB said is still plausible, gross domestic product would decline 12.6% this year and grow 3.3% and 3.8% in 2021 and 2022, respectively.
“In this scenario, several banks would need to take action to maintain compliance with their minimum capital requirements, but the overall shortfall would remain contained,” it said.
Andrea Enria, the ECB’s supervisory head, told reporters in a press call that in that case, banks would likely cut lending. As a result, governments might have to step in, boosting support for the economy and potentially for the banks themselves.
In a sign of some normalisation, the ECB said it would restart on-site inspections and other supervisory measures it had stopped in March, when most of Europe went into lockdown. It also told banks it continues to encourage them to use their capital and liquidity buffers to lend to the economy and make the necessary provisions for expected loan losses. It said buffers won’t be required to be replenished before 2022.
“It is all the more important to encourage banks to use their capital and liquidity buffers now to continue focusing on this overarching task: lending, whilst of course maintaining sound underwriting standards,” Enria said.
This article was published by The Wall Street Journal.