Macroprudential Communication on restrictions of profit distributions by Belgian financial institutions

“Belgian financial institutions should not resume profit distributions until at least 30 September 2021, unless strict conditions are met and the profit distribution is limited at a very prudent level”

Today, the European Systemic Risk Board (ESRB) published a new Recommendation (ESRB/2020/15) — amending Recommendation ESRB/2020/7 — on the restriction of profit distributions by European financial institutions during the COVID-19 pandemic. The ESRB recommends that relevant authorities request financial institutions under their supervisory remit to refrain, as from 2 January 2021 and until 30 September 2021, from profit distributions in the form of dividends, share buy-backs or obligations to pay variable remuneration to a material risk taker which has the effect of reducing the quantity or quality of own funds, unless the financial institutions apply extreme caution in carrying out any of those actions and the resulting reduction does not exceed the conservative threshold set by their competent authority. In calibrating the conservative threshold, the competent authorities should pay due regard to the need for financial institutions to maintain a sufficiently high level of capital. They also need to ensure that the overall level of distributions of financial institutions under their supervisory remit is significantly lower than in the recent years prior to the COVID-19 crisis. Where appropriate, relevant authorities are also recommended to apply this recommendation to financial institutions at the sub-consolidated or individual level.

In the spirit of above-mentioned ESRB Recommendation, the ECB published on 15 December its own recommendation (ECB/2020/62) for the profit distributions by the significant credit institutions for the period running until 30 September 2021. This new recommendation replaces the existing recommendation (ECB/2020/35) that requested these banks to not pay out dividends (inlcuding irrevocable commitments to do so) or conduct share buy-backs aimed at remunerating shareholders until 1 January 2021. The new recommendation aks the significant institutions to refrain from or limit dividends until 30 September 2021. In case banks resume profit distributions, the ECB expects the level of dividends and share buy-backs to remain below 15 % of the cumulated profit for 2019-20 and not exceed 20 basis points of the Common Equity Tier 1 (CET1) ratio, whichever is lower. Banks that intend to pay dividends or buy back shares need to be profitable and have robust capital trajectories. They are also expected to contact their Joint Supervisory Team to assess whether the level of intended distribution is prudent.

As microprudential supervisor for Belgian less significant institutions (LSIs), the NBB will soon publish a new NBB Communication extending this ECB recommendation (ECB/2020/62) to the Belgian banks under her remit. This will then replace the existing NBB communication NBB_2020_33 of 30 July 2020.

As microprudential supervisor for Belgian insurance and reinsurance undertakings, the NBB will also prepare a new Circular embodying the elements of the new ESRB recommendation for the Belgian insurance sector. The NBB intends to publish this new Circular in the beginning of 2021. This new Circular will then replace the existing Circular NBB_2020_34 of 25 August 2020.

The NBB, as macroprudential authority, considers the continuation of constraints on dividend distribution and variable renumeration justified. It agrees with the ESRB that profit distributions, if any, should only be possible if they are limited and conditional on satisfying a number of strict conditions and tresholds as regards to the prudent level of the envisaged distribution and the impact of the distribution on the quality and quantity of the financial institution’s own funds. By restraining profit distributions (or equivalent operations) until 30 September 2021, the resilience of the financial sector is preserved and even reinforced while ensuring the level-playing field within the sector. Against the background of still substantial uncertainties (including on loss developments in the financial sector) and remaining downside risks related to the COVID-19 crisis, the continuity of financial intermediation and credit provision to the real economy crucially hinge on the resilience of the financial sector to absorb credit and valuation losses. At the current juncture, maintaining the quantity and quality of banks’ and insurers’ own funds is key to preserve the loss absorption capacity in the financial sector. The financial sector should also not hesitate to use the available capital in the most appropriate way to perform its critical lending and other financial intermediation functions, including in the process of capital re-allocation linked to structural changes in the economy. A prodcuctive use of capital across the financial sector is critical to mitigate possible contra-productive and procyclical credit contractions and to support a sustainable economic recovery.

As it did in the similar Communication on 30 July 2020, the NBB as macroprudential authority fully and unconditionally endorses the steps taken by the relevant microprudential authorities to implement the most recent ERB Recommendation. The NBB reminds that these communications/recommendations by microprudential authorities should be applied by all Belgian credit institutions and insurance and reinsurance undertakings active in the Belgian financial market – irrespective of whether or not they are subsidiaries in an international group.[1] The comprehensive application of the ESRB-recommendation across all concerned financial institutions is necessary to maintain financial stability and ensure critical financial intermediation functions in Belgium, while also respecting the level-playing field. The NBB therefore urges all Belgian credit institutions and insurance and reinsurance undertakings to strictly apply the recommendation and communications regarding profit distributions until at least 30 September 2021.

This communication is based on the macroprudential mandate of the NBB as formalised in article 36/42 of its organic statute (law of 22 February 1998) to contribute to the stability of the financial system as a whole, in particular by strengthening the resilience of the financial system and by preventing the occurrence of systemic risks. Beyond communications, article 36/34 provides an overview of macroprudential instruments (under national law) available to the macroprudential authority in the pursuit of its mandate.

[1] This Communication therefore applies to all credit institutions and insurance and reinsurance undertakings under Belgian law, active on the Belgian financial market.