Eurozone banks will be allowed to pay dividends again from next year if they convince supervisors that their balance sheets are strong enough to survive the economic and financial fallout from the coronavirus pandemic
The decision would all depend on the conservatism of internal models in the banks, on conservatism in provisioning and a sound view of the capital trajectory of a bank.
Some banks were still using very rosy scenarios in their internal models to determine how much capital they needed. Banks could face a second wave of loan losses, especially if governments withdraw their loan guarantees before the economy has fully recovered.
Provisions have increased but look optimistic in some cases, while guarantees and moratoria may have lengthened the time it takes for weak economic performance to translate into loan losses.
Some countries such as Switzerland and Sweden have already indicated that they will allow bank payouts to resume next year, although the US Federal Reserve has not said if it will lift its cap on dividends and the Bank of England is also undecided on its ban.
An official ECB decision on lifting the ban on dividends will not be announced until after it publishes new economic forecasts on December 10.
In the first half of this year, large western banks booked more than $139bn in reserves to cover potential loan losses — the most since the nadir of the financial crisis in 2009. Yet provisions fell sharply after the economic rebound in the third quarter and many lenders’ capital buffers have grown far in excess of supervisory minimums.
The banks could still be hit by a surge in loan defaults. In a severe scenario modelled recently they could face an extra €1.4tn of non-performing loans, more than in the 2008 crisis.
https://www.ft.com/content/62c9e91e-ce88-41cb-aa23-de67687cdeef