European Central Bank tells banks to freeze dividend payments until next year and beyond

Bank of England: to review bank dividend regime at end of year

28 July 2020

BANKS were warned by the European Central Bank to freeze dividend payments until at least next year in what the City took as a warning shot across the bows of UK lenders.

UK banks are generally regarded as stronger than those in the eurozone and City figures fear this intervention is a move to prevent investors favouring London banks over those in mainland Europe.

The ECB also said today that staff bonuses should be “extremely moderate”.

While today’s guidance is roughly in line with the Bank of England’s, the timing of the ECB’s announcement ahead of the latest results from big UK banks this week was surprising to some.

One City analyst said: “It raises the spectre of further and longer dividend embargoes.”

Another said: “Dividends are an important part of the attraction for bank stocks. It is not just about keeping investors fed and watered, you want banks to be valued by the market because at some point if they need to raise capital, investors have to think there is a reason to get involved.”

Andrea Enria, chair of the ECB’s supervisory board, said: “The build-up of strong capital and liquidity buffers since the last financial crisis has enabled banks during this crisis to continue lending to households and businesses……therefore it is all the more important to encourage banks to use their capital and liquidity buffers now to continue focusing on this overarching task.”

The Bank of England welcomed the call and said it would carry out a review in the fourth quarter into whether banks could resume paying dividends next year.

But with bank shares massively under water analysts fear the sector risks becoming a pariah.

One banker said: “European banks are already lending into the economy at an unprecedented rate. Most have a reasonable capital buffer. So what is the problem that ECB is trying to solve? It looks to me that it is manging the herd to the pace of the slowest Zebra.”

Barclays is the first of the big banks to report this week, with figures tomorrow likely to reveal the scale of the hit from Covid-19, but also the bank’s resilience given the strength of its investment banking arm.

Virgin Money today increased its provisions for bad debts by another £42 million to £584 million. The amount set aside by banks in Europe, the UK and the US to deal with loans failing is expected to hit £100 billion for the second quarter alone.

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European Central Bank tells banks to freeze dividend payments until next year and beyond

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