As part of the Single Supervisory Mechanism (SSM), the European Central Bank (ECB) asked major European banks to refrain from paying dividends and share buybacks at the start of the COVID-19 pandemic in March 2020. This was to ensure that financial institutions could continue lending to companies during the pandemic and safely weather the crisis despite the threat of loan defaults. An analysis by the Leibniz Institute for Financial Research SAFE shows that this waiver of dividend payments had longer-term consequences for the funds’ exposure to these banks.
“Funds have reduced their holdings in large banks in the longer term following the announcement of the dividend restrictions,” says Christian Mücke, a researcher in SAFE’s Financial Markets Research Department and the study’s author. According to the study, funds reduced their holdings in banks by 17 percent until November 2020, the period of the first stricter restrictions by the European banking regulator. In contrast, other institutional investors showed little reaction. In July 2021, as the COVID-19 pandemic was increasingly contained and the economic situation eased, the ECB lifted the restrictions, and the banks could pay dividends again without restrictions from September onwards. However, even by the end of 2021, funds had not returned to their original levels of bank stocks.
Funds focus on dividends
The results of the SAFE paper suggest that funds are reducing their exposure to banks in anticipation of future policy interventions in bank dividend policies. The study shows that funds investing in banks focus on dividends: An increase in the dividend yield by one percentage point is associated with an increase of the average share of funds as bank shareholders by 9.9 percent.
According to the SAFE study, the banking sector’s ownership structure should be considered when deciding on similar restrictions in future crises. If dividend-seeking funds hold significant stakes in banks, dividend restrictions will lead to a sharp decline in the valuation of these banks’ shares. The SAFE analysis covers 50 major Swiss and European banks, 5,467 funds, and 1,831 institutional investors. Among banks’ institutional investors, funds are the largest shareholders.
Download the SAFE Working Paper No. 392
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Christian Mücke
