On 28 July 2020, the European Central Bank (ECB) extended its recommendation that banks not pay dividends nor buy back shares until January 2021. The ECB has also asked banks to be “extremely moderate” with regard to variable remuneration.
The ECB also encourages banks to use their capital and liquidity buffers for lending purposes and loss absorption. It will not require banks to start replenishing their capital buffers before the peak in capital depletion is reached. The exact timeline will be decided following the 2021 EU-wide stress test, and, as in every supervisory cycle, on a case-by-case basis according to the individual situation of each bank. The ECB adds that the same applies for replenishing the liquidity coverage ratio (LCR). The ECB will consider both bank-specific and market-specific factors when establishing the timeline for banks to rebuild liquidity buffers. The ECB commits to allow banks to operate below the Pillar 2 Guidance capital level and the combined buffer requirement until at least end-2022, and below the LCR until at least end-2021, without automatically triggering supervisory actions.
The ECB will review whether its stance remains necessary in the fourth quarter of 2020, taking into account the economic environment, the stability of the financial system and the reliability of capital planning.