The European Central Bank (ECB) announced on Tuesday 28 July its decision to extend by 3 months, until January 2021, its recommendation to banks not to pay out dividends or buy back shares.
Originally issued in March (see EUROPE 12461/14), this recommendation remains “temporary” and “exceptional” and aims to preserve the ability of banks to absorb losses and support the economy in this environment of exceptional uncertainty, the ECB assures.
The ECB also calls on banks to be “extremely moderate” with regard to the payment of variable remuneration, for example by reducing the overall amount of variable remuneration.
“We prefer to be prudent today rather than having regrets tomorrow should overall economic conditions deteriorate further”, said Andrea Enria, Chairman of the ECB’s prudential supervisory board. The monetary institute will review its decision in the fourth quarter of 2020.
Gradual return to normal
The ECB is already starting to prepare for the “return to normal”. It has announced that it will not require banks to start rebuilding their capital buffers until the peak of the decline in capital is reached, which is expected to occur in 2022. The exact timetable will be decided after the EU-wide stress test in 2021, on a case-by-case basis according to the specific situation of each bank, it specified.
The ECB also undertakes to allow banks to operate below the level of capital defined by the ‘Pillar II guidance’ (P2G) and the combination of capital cushion requirements at least until the end of 2022, and below the short-term liquidity ratio until the end of 2021, without triggering supervisory measures automatically (see EUROPE 12445/1).
On the other hand, it does not plan to extend the six-month operational constraint relief measures it had granted to banks in March 2020, except for banks with a high level of non-performing loans (NPLs).
These banks will be given an additional 6 months to submit their NPL reduction plans, the ECB said, to give them more time to better estimate the impact of the pandemic on asset quality.
See the updated recommendation: https://bit.ly/2X4W5Gz
Banking sector resilient
On the same day, the ECB published the aggregated results of its first ever assessment of the potential vulnerabilities of the euro area banking sector to the Covid-19 shock. The exercise, based on 2019 end-of-year data, assessed how the economic shock would affect 86 euro area banks over a three-year horizon.
“Overall, the results show that the banking sector is well positioned to take on the pandemic-induced stress impact, but capital depletion in the severe scenario could be material.”, the ECB said.
In the moderate scenario, which envisages a severe recession, the average Tier 1 capital ratio (CET1) of banks declines by only 1.9 percentage points to 12.6% instead of 14.5%. In the severe scenario, on the other hand, the banks’ average CET1 ratio falls by 5.7 percentage points to 8.8% instead of 14.5%.
While banks could continue to fulfil their role of financing the economy in the moderate scenario, they would need to take measures to be able to continue to meet their minimum capital requirements in the severe scenario, the ECB stresses, even if “the overall shortfall would remain contained”.
See analysis: https://bit.ly/3jHlWy5 (Original version in French by Marion Fontana)