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ECB urges banks to pause shareholder payouts for longer

Frankfurt

THE European Central Bank extended a request that banks hold off on returning capital to shareholders and show moderation in setting bonuses amid the coronavirus outbreak, dealing a blow to some lenders who had lobbied to resume business as usual.

The supervisor asked that banks not pay dividends or buy back shares at least until January, three months longer than initially indicated, and "to be extremely moderate with regard to variable remuneration", according to a statement on Tuesday. Bloomberg reported last week that the ECB was leaning towards such a request.

Banks including BNP Paribas have been lobbying to resume dividend payments as they seek to shore up slumping share prices, Bloomberg reported. A historic trading rally, regulatory relief, and extensive government loan guarantees have bolstered earnings at several banks. Switzerland's UBS Group indicated last week that it may return more capital to shareholders towards the end of the year.

The ECB first asked banks in March to not make dividend payments at least until October, in an effort to conserve capital as lockdowns to combat the pandemic brought the economy to a standstill. While the move was painful for some lenders and their investors, the central bank indicated it was a trade-off for unprecedented regulatory relief it had granted them to weather the crisis.

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The ECB said it will review its stance again in the fourth quarter to take into account the economic environment, stability of the financial system and banks' ability to plan their future capital levels.

"Once the uncertainty requiring this temporary and exceptional recommendation subsides, banks with sustainable capital positions may consider resuming dividend payments," the ECB said. That also applies if banks are operating below the non-binding portion of the ECB's capital demands, as long as the lenders can show "that their capital positions are sustainable in the medium term," the watchdog said.

The central bank has previously said its dividend request kept about 30 billion euros (S$48.6 billion) of capital in the euro area banking system. It has urged banks to comply on a voluntary basis, although its chief watchdog has said the ECB can take "legally binding measures" if the lenders don't do as asked.

The ECB reiterated a call for banks to dip into their capital buffers to maintain the flow of credit. The supervisor said it won't require banks to start replenishing buffers until after capital depletion reaches its peak, at any rate not before the end of 2022.

The central bank said that it won't extend much of the operational relief it afforded banks in addressing deficiencies such as inadequate risk models, although lenders with levels of bad debts will be granted an additional six months to submit their plans for dealing with such soured loans. BLOOMBERG

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