ECB tells eurozone banks not to pay dividends until January 2021

The European Central Bank has called on lenders to continue to freeze dividend payments until at least January 2021, in a move that further undermines the investment case for the sector.

The central bank has also written to lenders, asking them to be “extremely moderate” when setting bonuses in order to help absorb losses and support lending throughout the coronavirus crisis.

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, and thereby to help stabilise the real economy.

“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: lending, whilst of course maintaining sound underwriting standards.”

European bank stocks have been hit hard this year after lenders were pressed by regulators to suspend capital returns to shareholders at the height of the Covid-19 crisis. The Stoxx Europe 600 Banks index is down more than a third in 2020, compared with a fall of just over 10 per cent for the broader Stoxx Europe 600 index.

In March, the ECB ordered eurozone banks to halt dividend payments until at least October 1 in order to boost their ability to absorb losses and support lending.

The ECB’s single supervisory mechanism, which oversees the 117 biggest banks in the eurozone, called on banks to freeze dividends after the lenders benefited from unprecedented regulatory relief to allow them to continue lending to companies hit hardest by the crisis.

Regulators in the UK and Switzerland applied similar pressure on their domestic lenders to suspend capital returns.