On 28 July, the European Central Bank (ECB) extended their existing restrictions on banks to January 2021. As a result, banks cannot pay dividends to shareholders, or operate share buybacks, at the present time.
Why Is This Happening?
The ECB has imposed these measures in order to help the banks they regulate maintain capital reserves and profitability during the present economic crisis.
All ECB regulated banks are required to hold a minimum level of financial reserves. There is concern about potential losses that banks may have to absorb on loans made to their customers. These losses would impact reserves. By not paying out dividends or buying back shares, banks are instead maintaining this buffer.
The ECB further state:
“The build-up of strong capital and liquidity buffers since the last financial crisis has enabled banks during this crisis to continue lending to households and businesses, and thereby to help stabilise the real economy.”
The ECB also confirmed that they still viewed the restrictions as “temporary and exceptional“.
Will The Restrictions Be Lifted In January?
Unfortunately, no clear dates have been set for lifting the current rules. The restrictions will be reviewed by the ECB in the fourth quarter of 2020. At that point, the review will take into account the economic environment, financial stability of the banking system, and how easy it is for banks to plan their capital reserve requirements.
The ECB did confirm the following: “Once the uncertainty… subsides, banks with sustainable capital positions may consider resuming dividend payments.”
Bank Capital And Liquidity
The ECB stated they would provide banks with enough time to ensure capital and liquidity reserves were built back up, most likely the end of 2021 going into 2022.
Bonuses To Staff
Additionally, the ECB requires banks to “be extremely moderate with regard to variable remuneration payments.” In other words, reduce bonuses as far as possible, defer payments, or pay non-monetary rewards instead (such as shares).
For traders, the question will be what kind of impact this announcement may have, if any, on bank share prices in the near future.