Sven Giegold

Greens/EFA call on the ECB to maintain restrictions on dividends and share buy-backs for euro area banks

Under the Single Supervisory Mechanism, the ECB is the direct supervisor for the largest 113 euro area banks. Next week, the ECB will decide whether it continues its recommendation to supervised entities not to distribute dividends and buy back shares during the pandemic. The ECB had first issued such a recommendation on 27 March 2020. After an extension on 28 July, the current recommendation will expire on 1 January 2021. Due to a lack of legal powers, the ECB can only express a strong recommendation rather than impose a binding ban.

Recent rumours suggest that the ECB might discontinue the recommendation in its current form. While maybe not lifting the restrictions completely, it seems likely that the strongest institutions will be allowed to resume distributions. ECB officials have quoted the lack of a legal basis as a motivation for such an approach. Against this background, MEPs Sven Giegold and Ernest Urtasun of the Greens/EFA have sent a letter to Andrea Enria, Chair of the ECB’s Supervisory Board, calling for a continuation of the blanket ban on distributions. You can find the letter here.

MEP Ernest Urtasun of the Greens/EFA group commented:

“Banks are being financed in extremely favourable conditions by the ECB because now it is more needed than ever that they finance the real economy. We cannot accept that in this context, the financial institutions use these favourable conditions in their own interest and not in the common interest. We need banks well capitalized to face the global financial turbulence to come. It would be outrageous if banks were de-capitalised through dividend payments. We know the growing problem of the non-performing loans will heavily hit the sector, it is time for the EU supervisory authorities over the financial system to take all the necessary measures to ensure the resilience of the banks.”

MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:

“Lifting restrictions on dividend distributions and share buy-backs could not come at a worse time. Lately, the ECB has been warning relentlessly that the worst might be yet to come for the banks in this pandemic. Moreover, it has put forward strong evidence that banks are currently not accounting for risks and losses reliably. It would be irresponsible to lift restrictions as long as supervisors are still ‘flying blind’, as Mr Enria put it. Allowing distributions only for the strongest banks would further aggravate the current situation, as it would disincentivize the return to prudent loss accounting. I therefore call on the ECB to take its own arguments seriously and retain the blanket ban. Moreover, I urge the ECB to also consider restrictions on excessive compensation and bonus payments which continue to be a significant drain on banks’ capital.

“To blame dividend restrictions for the extremely depressed valuations of European banks is a red herring. After all, distributions are not cancelled but only postponed. It is hard to believe that markets do not price in the significant down-side risks from a surge in credit losses in the wake of the pandemic. Optimistic loss provisioning and the notoriously low profitability in an oversized sector certainly did not help building confidence.”

Category: Economy & Finance

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