Es are dramatic days for Europe and its citizens. The outbreak of the corona virus has hit many Member States hard. No one knows how much this crisis will worsen and how long it will last. Doctors and nurses heroically fight the outbreak at the forefront. At the same time, we who are involved in shaping economic policy must do everything we can to cushion the economic impact of this crisis.
We assume that households as well as small businesses and groups in the euro area will face extremely difficult economic and financial conditions. In response to the economic shock, the ECB’s banking supervisory authority has therefore announced unprecedented measures to relieve capital and flexibility in supervision in recent weeks. We also recommended that banks restrict dividend payments and share buybacks.
Unlike the financial crisis in 2008, banks are not the cause of the problem this time. But we have to make sure that they can be part of the solution. Our cushioning measures should enable banks to continue to provide financial support to private households as well as viable small businesses and groups that have been hardest hit by the crisis.
Our initiatives should not be viewed in isolation, but rather in connection with monetary and fiscal policy measures. In its role as central bank, the ECB has opened up additional, cheap sources of refinancing to banks and has also launched an extraordinary asset purchase program. In the area of banking supervision, we have loosened restrictions through capital and liquidity rules, thereby significantly increasing banks’ ability to lend and absorb losses without the need for prudential measures. Many governments have decided to provide temporary relief to debtors through payment moratoriums and to support banks with credit guarantees. At the same time, we have increased the flexibility of supervision in the regulatory treatment of loans that receive such support.
As part of our mandate as a regulator, we also asked banks to mitigate as much as possible the procyclicality associated with their models for determining loan loss provisions that were developed in accordance with international accounting standards (IFRS 9). This prevents the volatility of valuations under IFRS 9 from being significantly reflected in banks’ capital and in their profit and loss accounts during the crisis.
In view of the current difficult operational conditions and market conditions, we have also decided to postpone the final adoption and implementation of various supervisory decisions for a period of at least six months. We also informed the banks that we will be as flexible as possible when evaluating the implementation of current plans to reduce the number of non-performing loans.
Recommendation also for dividends for 2019
In my view, this should not be a one-way street. The world around us is currently coming to a standstill and everyone is fighting together against the corona virus. Banks and shareholders must also make their contribution to this joint effort. Own funds are the most effective tool for banks against unexpected shocks. Unfortunately, we are now warned and the economic shock resulting from the crisis can no longer be considered unexpected. We do not yet know how much and how long economic output will shrink. We hope for the best, of course, but we have to be prepared for the worst.
We have to maintain the capital base in the banking system so that banks can grant loans and absorb losses, especially when it is particularly necessary. For this reason, last week the ECB’s banking supervisory authority recommended that banks make no dividend payments or share buybacks until at least October 2020. This recommendation also applies to dividends for 2019 that have not yet been paid out – according to our information, around 30 billion euros. Banks that have submitted a dividend proposal to their shareholders for voting at the next general meeting should change it in accordance with our recommendation.
I firmly believe that these measures are in the long-term interest of the banks and their shareholders. By maintaining their critical functions and increasing support from households, small businesses and corporations as well as other financial institutions, banks are making an effective contribution to maintaining their value and strengthening their reputation.
Europe and its citizens face an extraordinary challenge. Only by mastering them can we ensure that the European banking sector remains solid and can help our economies recover quickly once this unprecedented crisis is over.
Andrea Enria is Chairman of the ECB’s European Banking Authority.