Banks are called on to consider dividend distribution responsibly
Taking into account the impact of COVID-19 on the economy, the European supervisors of financial market participants urge the banks operating in the European Union to continue to refrain from dividend distributions.
“The current experience of fighting the COVID-19 pandemic shows that the responsible behaviour of banks has been one of success factors for countering the challenges. The Bank of Lithuania supports the attempt of the European authorities to enhance the foundation of the whole financial system, however, we do not suggest to prohibit dividend distributions entirely. In exceptional cases, when a bank is well capitalised and the supervisory authority issues its permission, dividends of limited size might be paid out. Such decisions should be taken on a case-by-case basis,” said Vitas Vasiliauskas, Chair of the Board of the Bank of Lithuania.
The European Central Bank (ECB) asked all banks to consider not distributing any dividends or conducting share buy-backs, or to limit such distributions, until 30 September 2021. Given the persisting uncertainty over the economic impact of the coronavirus pandemic, the ECB expects dividends and share buy-backs to remain below 15% of the cumulated profit for 2019 and 2020 and not higher than 20 basis points of the Common Equity Tier 1 (CET1) ratio, whichever is lower. Banks should also refrain from distributing interim dividends out of their 2021 profits. More information is available here.
The European Banking Authority (EBA) also continues to call on banks to apply a conservative approach on dividends and other distributions in light of the COVID-19 pandemic. Given that the COVID-19 crisis and the uncertainty about its impact on the economy are likely to continue, with a possible further deterioration of asset quality over the next quarters, the EBA urges banks to refrain from distributing capital outside the banking system when deciding on dividends and other distribution policies, including share buybacks, unless extreme caution is applied. More information is available here.
The Bank of Lithuania also reminds that, considering the impact of the coronavirus pandemic on the economy, the EBA extended the application of the Guidelines on legislative and non-legislative moratoria on loan repayments to 31 March 2021. The Bank of Lithuania is of the opinion that the country’s businesses and households should have a possibility to take advantage of such moratorium and pay only part of the interest in the deferred period. It is important to note that private customers in Lithuania are also entitled to the deferment of repayments of a consumer or real estate credit for a period of three months without a special legislation on moratoria.