The European Central Bank Is Not Sorry For Lifting Bank Dividend Veto

The ECB seams to have drawn out itself from a little legal jeopardy by lifting its ban on bank dividends. Nevertheless, it has created such an environment around the issue that payouts will continue to be dismally thin for the near future, something that explains the relative absence of enthusiasm shown by bank Eurozone stocks as the details have dribbled out.

The Stoxx 600 Banks index was up 0.4% in the morning on Wednesday but was still down 0.7% on the week. The ECB’s supervisory board confirmed late on Tuesday that it would permit banks to pay out up to 15% of their increasing profits over the last two years, or an amount equal to 20 basis points from their core tier 1 capital ratio (the benchmark metric for financial strength), whichever is the smaller. That’s a modest adjustment to the stronger players in a struggling industry who regardless of the pressures of pandemic-driven loan losses, high legacy costs, ultra-low interest rates and technological change are still meeting all their statutory requirements on capital and liquidity. Departing ECB board member Yves Mersch had acknowledged in an interview in November that there would be legal difficulties in trying to sustain a blanket ban beyond the end of the year. Even as it lifted the ban, it “called on” and “asked” banks to refrain from paying dividends until September, and also recommended they should go easy on bonuses for traders who almost alone have generated profits for the industry this year.

The ECB has emphasized that banks went into this crisis in much better shape than in 2008, holding more capital and more opportunity to absorb losses. The total CET1 ratio at the end of the first quarter was a thoroughly respectable 14.4%. The ECB’s caution is understandable. While the current economic crisis clearly started outside the banking sector, its damage could be multiplied many times over if a new crippling wave of credit losses triggers a new financial crisis. Given that the ECB is now responsible for supervising the euro zone’s largest banks, such an embarrassment could fatally undermine its credibility not just as a supervisor but also in the realm of monetary policy.