The European Central Bank also reiterated its earlier guidance for bank bosses to exercise ‘extreme moderation’ on bonus payments © AFP via Getty Images

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Banks in the eurozone will be able to pay modest dividends to shareholders again from the start of next year under strict limits outlined by Europe’s top financial regulator on Tuesday.

The European Central Bank’s supervisory board recommended banks only distribute up to 15 per cent of their past two years of profits to shareholders and no higher than 0.2 per cent of their common equity tier one capital ratio.

Lenders should only restart dividend payments if they are profitable and have “robust capital trajectories” that can withstand the impact of the coronavirus pandemic, the central bank said.

The ECB, which oversees the 113 biggest lenders in the eurozone, also reiterated its earlier guidance for bank bosses to exercise “extreme moderation” on bonus payments by scrapping, deferring or converting into shares as many of their payouts as possible.

“We have been quite brave to ask banks to refrain from paying dividends at this difficult juncture,” said Andrea Enria, chair of the ECB supervisory board. “But at the same time we have to be reasonable — we are now moving out of that uncertainty, a vaccine has been rolled out and the macroeconomic outlook is lifting slightly, so we cannot play god forever.”

The new guidelines will last until the end of September 2021, the ECB said, at which point barring “materially adverse developments” it will return to its normal supervisory assessment of banks’ capital and dividend plans.

The move leaves eurozone banks more constrained on dividends than their UK rivals. The Bank of England last week said it would allow the strongest lenders to pay dividends worth up to a quarter of the past two years of profits or 0.2 per cent of risk-weighted assets.

The ECB ordered eurozone banks to stop all dividends and share buybacks to conserve €30bn of capital in March, shortly after the pandemic arrived in Europe. Since then, the sector has lobbied hard for stronger lenders to be allowed to resume payouts early next year.

The reopening of the door to bank dividends came shortly after several European countries, including Germany and the Netherlands, announced stricter lockdowns in response to a surge in coronavirus infections that are likely to push the eurozone into a double-dip recession.

Some officials have argued the banking sector should continue to conserve capital ahead of a potential surge in defaults that is likely when governments wind down their loan guarantees and other policies to shield the economy from the pandemic. The ECB has warned that in a severe scenario eurozone banks could be hit by €1.4tn of bad loans.

Mr Enria said there was “still a lot of work to be done to have more reliable figures on the outlook for non-performing loans” but he was now hopeful that the worst-case scenario of €1.4tn of extra bad loans would not materialise.

Mario Draghi, former president of the ECB, warned of “an emerging solvency crisis” that was likely to trigger a “cliff edge of insolvencies, especially of small-and-medium-sized enterprises, coming in many sectors and jurisdictions, as support programmes run off and existing net worth is eaten up by losses,” in a report by the G30 think-tank this week.

However, banks entered the pandemic with much higher levels of loss-absorbing equity capital than in the 2008 financial crisis, and senior bank executives have warned that the blanket ban on dividends risks backfiring by driving investors away from the sector and reducing its ability to raise capital. 

The ECB said: “Despite ongoing challenges, revised forecasts are close to the central scenario used in the vulnerability analysis conducted by the ECB in the first half of the year, which confirmed the resilience of the European banking sector.”

The US Federal Reserve has banned banks until the end of the year from buying back shares but only capped their dividends at either the previous year’s level or the average earnings for the past four quarters.

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