ECB Seeks Flexibility to Allow Payouts When Banks Lose Money

  • Blanket ban on payouts can lead to ``unpleasant situation''
  • ECB adds voice to EBA's calls for review of AT1 coupon ban

The European Central Bank is calling for European Union banking law to change to allow supervisors the option of permitting banks to make discretionary payments to investors and staff even when a lender loses money in a given year.

EU rules currently block payments of dividends, bonuses or coupons on contingent convertible bonds, known as CoCos, if a lender posts losses or reports zero profit, and breaches regulatory buffers. That forces the offender to calculate a subset of the profit and loss account called the maximum distributable amount, or MDA, which then restricts payments on a sliding scale.

“The problem is that this automatism can lead banks into a very unpleasant situation and they don’t have a chance to get out of that,” Korbinian Ibel, director-general for micro-prudential supervision at the ECB in Frankfurt, said on a conference call with reporters. “The MDA has a good intention, but we also need to make sure that no accidents happen. This is why we think it needs to be changed.”

The ECB is adding its voice to the European Banking Authority’s call for the European Commission, the bloc’s executive arm, to review the prohibition on banks making payouts, particularly on additional Tier 1 bonds. Concern that some lenders would be unable to make the payments on their CoCos added to the volatility that has sent the average price of such securities to 93.6 cents on the euro, from an average 101.1 cents last year, according to Bank of America Merrill Lynch index data.

‘Signaling Effect’

“The signaling effect of these statements should be positive for eurozone bank AT1 securities,” said Hank Calenti, an analyst at Wells Fargo & Co. in London, in a note to clients. “These views suggest to us that there may be considerable forbearance and regulatory flexibility with respect to eurozone bank AT1 coupon payments.”

A bank’s chief executive officer should be able to decide how to cut payouts in accordance with the firm’s business plan, Ibel said. According to the EBA, flexibility on payments should be allowed only in exceptional circumstances and only to support the implementation of a plan to conserve capital within the company.

The calculation of MDA is defined in the EU’s Capital Requirement Directive IV.

The ECB has backed away from its opposition to allowing banks to disclose the results of its yearly review of their capital and business models -- the Supervisory Review and Evaluation Process, or SREP -- although it won’t publish the results itself.

“There is an EBA recommendation -- we will stop discouraging and fully follow the EBA recommendation,” Ibel said. “If somebody publishes it, it must be the bank because it has also an opportunity to explain.”

In 2015, the ECB asked banks to refrain from publishing the SREP capital requirements it set unless they were obliged to do so by national law. Investors, market supervisors and the banks themselves objected to the ban because the level set impacts a bank’s ability to pay a dividend or coupons on its CoCos.

“There is a need for investors to be informed,” Ibel said. “More and more banks will publish compared to last year.”

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