'Expectations for Economic Recovery?'... Eurozone Banks Likely to Be Allowed to Pay Dividends for the First Time in 9 Months

"ECB Supervisory Board Likely to Approve Under Strict Conditions"... Decision on 14th
"Concerns Over Loan Defaults" Opposition Also Raised

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Eurozone (19 countries using the euro) banks are expected to partially resume dividend payments for the first time in nine months since the COVID-19 pandemic. As expectations for economic recovery have grown following the start of COVID-19 vaccine distribution, the European Central Bank (ECB) Supervisory Board has decided to allow dividend payments. However, since concerns about loan defaults remain, the payment conditions will be maintained more strictly.

According to major foreign media on the 13th (local time), the ECB Supervisory Board will hold a meeting on the 14th and announce 'dividend payment requirements' allowing dividend payments to some of the 117 large banks in the Eurozone whose soundness has been secured. In March, as the spread of COVID-19 rapidly accelerated in Europe, the ECB Supervisory Board had taken measures to ban both dividend payments and share buybacks. This was intended to prevent the outflow of 30 billion euros (approximately 39.7 trillion KRW) of capital secured by banks within the Eurozone.

The ECB changed its stance to allow banks to pay dividends again due to strong demands from the banking sector. Banks argued that they have secured more funds than during the 2008 global financial crisis and have sufficient safety nets, and that the ban on dividend payments actually reduced investor interest in banks, preventing new capital inflows. The Euro Stoxx 50 index, a Eurozone benchmark, fell about 8% compared to the beginning of the year, but the Euro Stoxx Banks index recorded a decline of over 25% during the same period.

A chairman of a European commercial bank expressed dissatisfaction, saying, "Banks may seem like a privileged sector, but looking at the stock prices, it's exactly the opposite." Accordingly, the banking sector has been lobbying regulatory authorities to allow the resumption of dividend payments early next year.

The fact that dividend payments by banks have started to be allowed again in European countries outside the Eurozone also appears to have influenced the ECB's decision. Swiss UBS Group and Credit Suisse have announced their intention to pay dividends next year with the consent of their national regulatory authorities.

However, the scope of the ECB's allowance is expected to be limited. Sources reported that the ECB is preparing to lift the dividend payment ban after nine months while strengthening the payment regulations. Dividend payments will only be possible when banks have accumulated sufficient capital to absorb expected losses from the COVID-19 crisis. To this end, the ECB is expected to refer to the Bank of England (BOE) regulation announced last week, which allows dividend payments only up to 25% of the bank’s accumulated profits over the past two years or 0.2% of risk-weighted assets. There is growing speculation that the ECB will use the BOE’s regulation as a 'guardrail' and set a lower shareholder dividend cap.

One source said, "The most likely scenario is that the BOE will allow dividend payments only to some banks that meet specific limited requirements." Another source stated that Eurozone banks are expected to be restricted to paying dividends of about 10-20% of their profits.

Foreign media reported that there was conflict within the ECB Supervisory Board regarding the extension of the dividend payment ban. Some argued that dividend payments should be blocked to secure funds, fearing that if governments reduce economic stimulus measures implemented to mitigate the impact of COVID-19, defaults would suddenly increase. In particular, Helmut Ettl, head of Austria’s supervisory authority and an ECB supervisory board member, publicly stated that banks must "exercise great caution" regarding dividend payments.

This content was produced with the assistance of AI translation services.