The prospects for an increase in bank dividends due to the improvement in income and, above all, the lower needs for provisions, have raised the prices of banks on the stock markets. However, this Thursday, Christine Lagarde, the president of the European Central Bank (ECB) has restrained that optimism. The vulnerabilities of financial markets have increased, he warned, and believes that recent episodes of volatility underscore the uncertainties and risks of abrupt changes in asset valuations, so he has insisted that banks keep their dividends below of a conservative threshold.
“The vulnerabilities of financial markets have increased,” Lagarde said in a speech given on the occasion of the meeting of the International Monetary and Financial Committee, where he stressed that optimism in financial markets “is at odds with weakened corporate balance sheets” , according to Europa Press. This situation could lead to an increase in defaults and, therefore, a greater need for provisions by banks.
On December 15, the Supervisory Board of the European Central Bank (ECB) agreed to lift the veto on dividends from banks, although it urged them not to distribute more than 15% of the accumulated profits in 2019-2020 or not to exceed 0.20 points of the capital ratio CET 1. Of both amounts, they must choose the smaller one.
This measure will be in effect until September 2021, when it will be reviewed to study whether it can be lifted based on the economic situation. This limit, reflected in a letter sent to the bankers, it is well below what they distributed before this crisis, between 40% and 50% of the profit.
Since this agreement, almost all managers have assured their intention to return to the dividends of the past, because they consider that this is the main stimulus to attract investors and raise their weak prices on the stock market.
Caution against increasing risks
In the case of banks in the euro area, the French has highlighted that they have solid reserves of capital and liquidity of capital and liquidity, but has recognized that they face increasing risks in the quality of the assets at the same time as their profitability remains low.
At the same time, and this is the underlying problem, the non-banking financial sector has indicated the increase in vulnerabilities due to recent market developments in a context of prolonged risk-taking and deterioration of liquidity buffers. Thus, given the importance of maintaining support measures for companies and households, although, as far as possible, temporary and increasingly selective, the central banker has considered it essential that the prudential authorities ensure that the buffers capital can be used, if necessary, to absorb losses and support loans and thus avoid the limitations of the credit supply, while it has asked banks to be proactive in identifying and managing risk.
“While uncertainty remains high, we will encourage prudence and ask banks to be extremely cautious and keep distributions in the form of dividends, share buybacks and variable remuneration below a conservative threshold,” he said. Likewise, despite the fact that the macroeconomic prospects in general are better today than a few months ago, Lagarde has expressed the need to continue working in a coordinated manner to address the challenge of the pandemic, for which he has warned that it is essential to “refrain from withdrawing support measures prematurely, whether in the monetary or fiscal aspect ”.
In this regard, the President of the ECB has reiterated that the entity will continue to focus on maintaining favorable financing conditions without the obligation to fully exhaust the planned volume of its pandemic purchasing program (PEPP), but with the willingness to recalibrate said reach if necessary to reach your goal. Lagarde asks banks to keep the dividend below a conservative threshold
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