ECB heads off credit crunch with bank dividend and share buyback freeze
(29 March 2020 – Europe) The European Central Bank (ECB) is requesting banks suspend dividend payments through to the end of Q3 2020 to preserve lending capacity amid the escalating coronavirus crisis. The move follows U.S. banks suspending share buybacks to conserve reserve capital.
The European Banking Federation said that banks should halt 2020 dividend payments but 2019 payouts should be the decision of individual institutions. The additional capital buffer is unlikely to be used for new lending but will be needed to prevent banks from unwinding their loan books once an expected economic downturn forces them to apply more capital to existing loans. European companies often do not pay dividends on a quarterly basis, often paying out annually or biannually. Norway’s financial regulator has already requested that the government ban banks and insurers from paying dividends until further notice, following a similar move in Sweden. Spain’s Banco Santander is the only European lender to officially postpone its interim dividend so far.
Bank of America, Goldman Sachs and six of the other U.S. banks suspended stock buybacks through Q2 2020 in an effort to support "customers, clients, and the nation" amid the coronavirus pandemic. Dividends are becoming rarer as the coronavirus pandemic spreads. Many major U.S. corporates have already suspended their dividends such as Delta Air Lines, Ford and Marriott International. IHS Markit projected there will be 230 dividend suspensions from the 1,800 largest corporates globally. Under the US$2 trillion stimulus package signed into law, companies wouldn't be able to pay dividends until "12 months after the date of the loan or loan guarantee is no longer outstanding."
The ECB asserted that the recommendation "concerns dividends for 2019 and 2020, at least until October this year”. The regulator said that its recommendation to forgo dividends was "to boost banks' capacity to absorb losses and support lending to households, small business and corporates" during the pandemic.
“The banks would save €30 billion that they would have paid out in dividends. As everything around us is being put on hold to focus all the efforts of our communities on the fight against the coronavirus, a contribution is also required from banks and their shareholders,” stated ECB Supervisory Board Chair, Andrea Enria.