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The European Central Bank has ordered eurozone banks to freeze dividend payments and share buybacks this year in an escalation of its efforts to avoid coronavirus triggering a credit crunch in Europe.

The move is expected to result in many of the region’s largest banks either cancelling or delaying plans to return billions of euros of excess capital to investors. 

The ECB said banks “should not pay dividends for the financial years 2019 and 2020 until at least 1 October 2020”. It added that they should “refrain from share buybacks aimed at remunerating shareholders”. 

The freeze on distributing capital to investors was to “boost banks’ capacity to absorb losses and support lending to households, small businesses and corporates during the coronavirus (Covid-19) pandemic,” the ECB said.

Andrea Enria, chair of the ECB's supervisory board, said the banks would save €30bn 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," said Mr Enria in a blog post.

While central bankers are confident that the banking system is in much better shape than the 2008 financial crisis, they are worried that the imminent economic downturn could be amplified if lenders pull back from lending to businesses and households.

With economists forecasting that the eurozone is likely to suffer an even deeper recession than the one that followed the 2008 financial crash, regulators are keen for banks to keep as much of their balance sheets free to absorb a likely surge in borrower defaults.

The ECB has already relaxed capital requirements for the sector — providing an estimated €120bn of capital relief that could fund €1.8tn of new loans — as part of a package of measures to contain the fallout from the coronavirus pandemic that includes ultra-cheap loans for lenders.

When it announced the first set of measures two weeks ago, it said banks should use the extra capital relief “to support the economy and not to increase dividend distributions or variable remuneration”.

The extra capital relief is unlikely to be used for new lending, according to a senior ECB official, but it will be needed to prevent banks from shrinking their loan books once an expected economic downturn forces them to put more capital against existing loans. 

The central bank said its latest decision would not “retroactively cancel” dividends already paid out by banks for 2019, but it said any resolutions on planned dividend payments that are due to be voted on by shareholders should be amended to delay the payouts.

The move by the ECB, which was announced on Friday evening, came after central bank governors and heads of regulation that oversee the Basel Committee said they would defer by a year tough new bank capital requirements to allow lenders to focus on responding to the coronavirus crisis.

Earlier this week, the European Banking Federation recommended that banks freeze dividend payments and share buybacks in a letter to the ECB’s Single Supervisory Mechanism, which oversees the 117 biggest banks in the eurozone.

The strain on banks’ balance sheets was increased in the past three weeks with more than 130 companies in Europe and the Americas drawing at least $124.1bn from their lenders, according to an analysis by the Financial Times and people briefed on the activity.

Norway’s financial regulator has already requested that the government ban banks and insurers from paying dividends until further notice, following a similar move from Swedish supervisors. 

Thus far, Spain’s Banco Santander is the only European lender to postpone its interim dividend. Ana Botín, its chairman, also personally donated 50 per cent of her pay to a fund to pay for medical equipment set up by the Spanish bank. 

Earlier this month, eight of the biggest US banks — including JPMorgan, Bank of America and Citigroup — said they were suspending their multibillion-dollar share buyback programmes until at least July, citing the “unprecedented challenge” from the pandemic.

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