NBB Macroprudential Communication on dividend distributions

Following earlier communications by the ECB and the European supervisory authorities (ESAs) requesting financial institutions to refrain from dividend distributions (and other similar actions), the European Systemic Risk Board (ESRB) published on 27 May 2020 an additional recommendation to relevant authorities (ESRB/2020/7).

In this recommendation the ESRB urges the relevant authorities, including national macroprudential authorities, to request the financial institutions under their supervisory remit to refrain from undertaking any of the following actions at least until 1 January 2021:

a) make a dividend distribution or give an irrevocable commitment to make a dividend distribution;

b) buy-back ordinary shares;

c) create an obligation to pay variable remuneration to a material risk taker.

The NBB, as macroprudential authority, considers the extension of existing constraints on dividend distribution and variable renumeration justified. By refraining from capital and profit distributions (or equivalent operations), the resilience of the financial sector is preserved and even reinforced while ensuring the level-playing field within the sector. Against the background of 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 and – if possible – reinforcing existing capital stock is required to preserve the absorption capacity in the financial sector. Going forward, it is also important in this context to encourage the financial sector to use the available capital – if needed – to continue to support and promote credit provision to the economy and perform the critical financial intermediation functions, also in cases where severe downside risks would materialize. In these cases, the use of capital across the financial sector may prove critical to mitigate possible contra-productive and procyclical credit contractions, exacerbating the impact of crisis on the real economy.

Against this background the NBB as macroprudential authority fully and unconditionally endorses the recent communications by the relevant microprudential authorities. On 27 July 2020 the ECB published a recommendation (ECB/2020/35) requesting that “until 1 January 2021 no dividends are paid out and no irrevocable commitment to pay out dividends is undertaken by credit institutions for the financial years 2019 and 2020 and that credit institutions refrain from share buy-backs aimed at remunerating shareholders.” The NBB as microprudential authority for Belgian less significant institutions (LSIs) published on 30 July 2020 a communication (NBB_2020_33) extending this ECBrecommendation to the Belgian banks under her remit (Belgian LSIs). Moreover, the NBB as microprudential supervisor for insurance and reinsurance undertakings decided to request these undertakings to continue to refrain from dividend distributions until at least 1 January 2021.

The NBB, as macroprudential authority, would like to clarify 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, while also respecting the level-playing field. The NBB therefore urges all Belgian credit institutions and insurance and reinsurance undertakings to apply the above-mentioned recommendation and communications.

This communication is based on the macroprudential mandate of the NBB as formalized 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.