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ECB: Banks should suspend dividends until October

31 March 2020: the European Central Bank (ECB) has asked banks in Europe to suspend dividends and share buybacks until October.

The ECB repealed EU legislation from January on dividend distribution policies to make it easier for banks to manage the change. The move would preserve liquidity for banks and allow them to continue to fulfil their function as credit providers for households, SMEs and businesses during the COVID-19 crisis.
 
In a statement, the ECB stated that “capital resources to support the real economy and absorb losses should take priority at present over discretionary dividend distributions and share buy-backs”.
 
The recommendations also suggested that discretionary dividend distributions should not be made by ‘less significant’ credit institutions either. While a recommendation, the guidance by the central bank means those who have a legal conflict over the payments of dividends would have to explain the reasons to their joint supervisory team.
 
A review of the dividend freeze will be taken on 1 October 2020.
 
Commenting on the move John Mongelard, ICAEW technical services manager, risk and regulation, said: “Around the world governments are pulling out all the stops to support people, families and the real economy through what they hope will be a short period of disruption. So they want that money to go to work where it is most needed. 
 
“However, in the last crisis some governments were criticised for bailing out banks and rescuing 'greedy bankers'. This edict seeks to make clear beyond doubt that the government support is to be used for the good of the people and not as an excuse for the enrichment of a few.” 
 
In the UK, the FCA and the BoE have undertaken a raft of policy measures in the past week to maintain liquidity in the banking system to prevent a credit crunch as seen in 2008.
 
This has included reducing the counter-cyclical buffer requirement to 0%; the reduction of the Base Rate to an all-time low of 0.1%; and offering to buy an unlimited amount of corporate debt where it meets certain conditions.
 
Consumers have also been given a three-month mortgage holiday, and the FCA is considering the suspension of credit card charges; both of which will challenge bank cash reserves in the short term.