FRANKFURT AM MAIN, Germany – The European Central Bank (ECB) on Friday, March 27, asked eurozone banks to freeze dividend payments “until at least October 2020” to preserve liquidity that can be used to help households and companies through the coronavirus crisis.
The Frankfurt institution also asked banks not to buy back shares, another tool to reward shareholders, at a time when policymakers everywhere are taking unprecedented steps to support the global economy.
“The ECB expects banks’ shareholders to join this collective effort,” it said in a surprise statement.
The measures would “boost banks’ capacity to absorb losses and support lending to households, small businesses, and corporates during the coronavirus pandemic,” it added.
The ECB’s proposal, which would affect dividends for the financial years 2019 and 2020, echoes that of the Brussels-based European Banking Federation which earlier this week said “listed banks should not accrue dividends or undertake share buybacks so as to maintain maximum capital preservation” during the crisis.
The ECB’s suggestion is likely to be welcomed by eurozone citizens, many of whom vividly remember the taxpayer bailouts of global banks during the 2008-2009 financial crisis.
“The coronavirus outbreak is threatening the lives of many people around the globe and is pushing the economies of many countries into recession,” ECB supervisory board chair Andrea Enria said in a separate blog post.
“Unlike in the 2008 financial crisis, banks are not the source of the problem this time. But we need to ensure that they can be part of the solution.”
He estimated that compliance with the ECB’s proposal would keep an extra 30 billion euros ($33 billion) of capital in the financial system.
While many eurozone banks may be able to hold off on their 2020 dividend payments, some have already paid out those for 2019 or have committed to doing so.
The ECB said it was not asking for those payouts to be scrapped, but lenders whose shareholders are set to vote on dividend proposals in upcoming annual meetings “will be expected to amend such proposals in line with the updated recommendation.”
After initially facing criticism for not taking as much action as other central banks in the coronavirus fightback, the ECB has in recent weeks unleashed a flurry of measures to shore up the 19-nation euro area.
That includes a “big bazooka” scheme to buy an additional 750 billion euros ($832 billion) in government and corporate bonds this year to keep cash flowing through the financial system.
The ECB has also launched a fresh round of ultra-cheap loans to banks and eased rules on capital buffers to encourage banks to offer loans to households and businesses.
It further sought to calm markets by promising there would be “no limits” to its commitment to protecting the euro.
The ECB warned earlier this month that it expected banks “to use the positive effects coming from these measures to support the economy” and not to increase dividends or bonus payouts.
Authorities in the Nordic countries of Finland, Norway, and Sweden have likewise been urging banks to forego paying out dividends.
The novel coronavirus has so far killed more than 26,000 worldwide, with hard-hit Italy alone accounting for more than 9,000 deaths.
Over half a million people have been infected. – Rappler.com