Banks and insurance companies in Europe are to refrain from paying dividends, variable remuneration, and from buying back shares at least until 1 January 2021 and even longer if necessary as the European Systemic Risk Board (ESRB) recommends in its current report. According to these recommendations, insurance and reinsurance companies as well as banks will have to cope with losses in the wake of the economic consequences of the corona pandemic. To offset these losses, the European banking industry is dependent on capital buffers. To ensure, these buffers are not jeopardized the ESRB demands not to distribute any dividends, as ESRB representative Francesco Mazzaferro explained at the joint policy webinar organized by SAFE, the Florence School of Banking & Finance (FBF) and the Centre for Economic Policy Research (CEPR).
"The ESRB recommendation targets the major risk carriers of the corona pandemic," Mazzaferro said. "Without payout restrictions, we will soon be talking about the distribution of losses rather than the distribution of dividends." If Europe's banking industry does not follow the recommendations, the ESRB will be forced to raise the matter with the European Parliament and the EU Council of Ministers as well as with the relevant national supervisory authorities. In the discussion during the webinar, however, Mazzaferro faced criticism from academics and advisors towards the ESRB's approach.
Payout restrictions hamper market forces
According to SAFE Director Jan Krahnen, an intervention according to the ESRB's ideas is neither necessary nor proportionate. "The imposition of strict payout restrictions may fundamentally change market expectations on equity in banks, potentially changing investment willingness and behavior," Krahnen said. The ban demanded by the ESRB would also run the risk of undermining the bail-in rule applicable throughout Europe, which would ultimately prevent a market shakeout. "Such an intervention damages market discipline," continued Krahnen, "the responsibility should rest with the shareholders". Sylvie Mathérat, member of the High-Level Forum on Capital Markets Union of the EU Commission, and Viral Acharya from the Stern School of Business at New York University expressed similar views.
Although payout restrictions could be seend as common sense, the specification of its scope and not least the duration of the measure would entail some risks for all market participants, Matherat said. Thus: "The rules of the game must remain clear." Supervision should not dictate particular instruments of market regulation such as restraining dividends, said Acharya. Instead, the individual freedom of decision regarding sufficient capital buffers for credit institutions must be preserved especially in emergency situations, such as the Corona pandemic recently caused.