by Lieve Lowet
We live in exceptional times. Right now it is good to check whether the measures announced at high speed comply with the basic principles of correct decision-making and that they are in accordance with the applicable laws and regulations. I have made an in-depth analysis and would like to share my findings in a series of three articles. The articles will be published on three consecutive days. On 17 January 2020, in tempore non suspectu, the ECB issued a recommendation on dividend distribution policies to prepare banks for the introduction of IFRS9 and the new CRD / CRR requirements (ECB / 2020/1, OJ C30 29 January 2020). Banks, even those with “fully loaded” ratios, were recommended to distribute their net profits in dividends in a conservative manner. And then the corona crisis started to hit….
The ECB sent first a letter on 3 March 2020 to all significant banks to remind them of the critical need to consider and address the risk of a pandemic in their contingency strategies. There was no mention about dividend policy postponement yet. The first one to react on EU level was the European Banking Authority (EBA). In its 12 March 2020 statement, it urged banks to follow prudent dividend and other distribution policies, including variable remuneration, and use capital for ensuring continuous financing to the economy. The EBF’s letter of 11 March calling for European measures did not suggest any such action.
A full two weeks later, on 27 March, the ECB withdrew its January recommendation and published a new recommendation targeted again to the significant banks it supervises. National competent authorities were invited to do the same for less significant supervised entities and groups, which for example BaFin and Banca d’Italia did. The ECB recommended to postpone dividend payments for the 2019 and 2020 financial years until at least 1 October 2020 (see OJ 30 March 2020). The recommendation applies both on consolidated and on individual levels.
The term ‘dividend’ according to the ECB refers to any type of cash pay-out that is subject to the approval of the general assembly, and it adds that this is also valid for mutuals, cooperatives and savings institutions (in line with, but without referring to, Article 27 of the Capital Requirements Regulation (CRR) which defines common equity tier 1 items for these banks). After October, the ECB said it would further evaluate the situation. Banks should also refrain from share buy-backs aimed at remunerating shareholders. The move according to the ECB is estimated to retain approximately €30 billion of capital. This recommendation followed earlier relief measures for banks issued on 12 and 20 March including a decision of the ECB to relax capital requirements for banks good for € 120 billion, and the release of buffers valued at € 22 billion. Banks are expected to use the positive effects resulting from these measures to support the economy.
EBA stepped up its actions
On 31 March, EBA stepped up its actions. Following the ECB’s move, it urged in a statement all banks to refrain from dividends distribution or share buybacks which result in a capital distribution outside the banking system, in order to maintain its robust capitalization, and to review remuneration policies. So EBA added the element ‘distribution outside the banking system’ unlike the ECB’s recommendation. It however acknowledged that already many competent authorities communicated to banks their general expectations or engaged in bilateral dialogues in order to limit or refrain from dividend distribution and share buybacks.
To underline the importance of these actions, and the need for a level playing field among Member States, the EU’s Ministers of Finance in light of the recommendations from supervisory authorities, urged on 16 April “all banks that have not already decided to do so to refrain from making distributions during this period and to use the freed capital and available profits to extend credit or other urgent financing needs arising from the ongoing crisis to their customers in a way that helps to ensure preserving econall banks that have not already decided to do so to refrain from making distributions during this period and to use the freed capital and available profits to extend credit or other urgent financing needs arising from the ongoing crisis to their customers in a way that helps to ensure preserving economic activity”.
The ministers did not refer to distribution outside or inside the banking system. There was also no reference to the extensive state support packages which several Member States had put together, a link which for example BaFin made explicitly in its Opinion of 30 March : “Die durch das umfangreiche Maßnahmenpaket der Bundesregierung und die aufsichtlichen Anpassungen erlangten Freiräume sollen die Institute daher nach Ansicht der BaFin nicht für die Zahlung von Dividenden nutzen.“
At no point in time did either EBA or the ECB, as supervisor of the most significant eurozone banks, refer to the capital conservation measures of Article 141 of the Capital Requirements Directive (CRD). The ECB referred quite remotely to it by referring to ‘EU law’ in the last footnote of its 12 March press release titled “ECB Banking Supervision provides temporary capital and operational relief in reaction to coronavirus”. But it did not refer to it in its recommendation of 27 March. Why? According to Linda van Goor, independent banking consultant, Article 141 gives a clear legal base for the ‘urge not to distribute’.
It goes even further, as it states that an institution that meets the combined buffer requirement if it would distribute in connection with Common Equity tier 1 shall not make such distribution to an extent that would decrease its Common Equity Tier 1 capital to a level where the combined buffer requirement is no longer met. In other words, banks who use their buffers may not distribute their distributable amount, according to van Goor. More, CRD further determines the maximum distributable amount of an institution in Article 141 CRD. Was this considered when releasing the recommendations?
EIOPA and EBA statements
On 17 March, EIOPA in its “Statement on actions to mitigate the impact of Coronavirus/COVID-19 on the EU insurance sector insurance companies” (point 9) followed in the footsteps of EBA’s first statement. Insurers should take measures to preserve their capital position in balance with the protection of the insured, following prudent dividend and other distribution policies, including variable remuneration. On 2 April, a few days after EBA’s second statement, EIOPA also stepped up its action, with a new statement, urging (re)insurers at the current juncture temporarily to suspend all discretionary dividend distributions and share buy backs aimed at remunerating shareholders.
This suspension should be reviewed as the financial and economic impact of the COVID-19 starts to become clearer. The statement also urged this prudent approach to be applied by all (re)insurance groups at the consolidated level including significant intra-group dividend distributions or similar transactions, whenever these may materially influence the solvency or liquidity position of the group or of one of the undertakings involved. The materiality of this impact should be monitored jointly by the group and solo supervisors.
Where EIOPA’s statement is different from EBA’s statement is the open-ended deadline regarding the end of the measures coupled with the option to review the suspension (no deadline versus 1 October 2020). Different is also the specification that the measures are also valid for intra-group dividend distribution, which however the ECB recognised in its 27 March recommendation. And the reference EIOPA added to materiality (materially influence of the solvency or liquidity position) for intra-group suspensions is completely missing in the ECB’s recommendation and in EBA’s statements.
The next article in this series of 3 articles by Lieve Lowet is about Solvency II and will be published tomorrow on the Risk & Compliance Platform. You can respond and ask Lieve questions via the comments button at the bottom of this article.
The author, Lieve Lowet is an EU Affairs consultant and lobbyist since 2003, focuses on European dossiers relevant for the insurance and pension sector. From 2003 to 2008, she was Secretary-General for the international mutual insurance association AISAM (now AMICE), which accounted for 15% of the European and 6% of the world insurance market. Prior, she worked for McKinsey as a European banking and insurance expert.
