What's going on?
The European Central Bank (ECB) put the region’s commercial banks on a time-out on Tuesday, asking them to hold off shareholder payouts until at least next year.
What does this mean?
Since the pandemic struck, the ECB’s support for the eurozone has focused on giving banks ultra-cheap loans so they’re able to help small- and medium-sized businesses. At the same time, the risk that those loans won’t be repaid has risen, meaning banks have had to squirrel away more cash to cover potential losses.
It might make sense, then, that the ECB previously told banks to hold on to as much cash as possible: it temporarily banned dividends and share buybacks, and promised things would be back to normal by the end of the year. But on Tuesday, the ECB extended the ban to January at the earliest due to still-high levels of coronavirus uncertainty, and said it’d review its decision again before the end of the year. That’s around the same time the Bank of England plans to review proposed payouts by British banks, after the country’s financial regulator suggested they suspend them too.
Why should I care?
For markets: Stressed out.
Some investors – like pension and insurance companies – will be particularly annoyed by the news: they rely heavily on banks’ payouts, so this ban could force some of them to sell their stocks and buy regular dividend-paying shares instead. But it might be doubly frustrating for the banks themselves, given that they’ve recently passed eurozone “stress tests” proving they’re well-placed to survive even the most extreme pandemic scenario.
Zooming out: Who needs Europe?
If investors are after dividends, they might need to look elsewhere. Things aren’t exactly going great in the US – the country’s central bank announced an extension to its various coronavirus loan programs on Tuesday – but most American banks are still paying dividends. And Swiss investment bank UBS – not beholden to eurozone rules – said it’s hoping to both maintain dividends and resume lucrative share buybacks this year.