On 28 July 2020, the European Central Bank (ECB) extended its recommendation on dividend distributions to preserve banks' capacity to absorb losses and support the economy in the current environment of exceptional uncertainty (see our update of 27 March 2020 below). The ECB recommends that banks should refrain from paying dividends and performing share buy-backs aimed at remunerating shareholders during the period of the COVID-19-related economic shock. Furthermore, the ECB recommends banks to be extremely moderate with regard to variable remuneration. The Recommendation concerns the financial years 2019 and 2020 and applies until January 2021. The ECB states that, amongst other things:

  • It will review whether its stance remains necessary in the fourth quarter of 2020. 
  • It will continue to assess banks' remuneration policies as part of its Supervisory Review and Evaluation Process (SREP).
  • It continues to encourage banks to use their capital and liquidity buffers for lending purposes and loss absorption.
  • It commits to allow banks to operate below the P2G and the combined buffer requirement until at least end-2022, and below the liquidity coverage ratio (LCR) until at least end-2021, without triggering supervisory actions.
  • It does not plan to extend the six month operational relief measures it granted to banks in March 2020, with the exception of non-performing loans (NPL) reduction plans for high-NPL banks. High-NPL banks will receive an additional six months to submit their NPL reduction plans to provide banks with additional time to better estimate the impact of the COVID-19 pandemic on asset quality.

The ECB also issued two letters on 28 July 2020 from Chair of the Supervisory Board Andrea Enria to the CEO of the significant institution. In his first letter, Mr. Enria asks banks to be extremely moderate with regard to variable remuneration, for example by reducing the overall amount of variable pay. In his second letter, Mr. Enria communicates its expectations that banks have in place effective management practices and sufficient operational capacity to deal with the expected increase in distressed exposures.

The same day, the Dutch Central Bank (DNB) announced that it endorses the ECB's recommendation and ECB's expectations regarding buffers and deems it applicable also to less significant institutions that are under its supervision (in Dutch only).