ECB seeks flex­i­bil­ity to al­low pay­outs when banks lose money

The Pak Banker - - COMPANIES/BOSS -

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, di­rec­tor­gen­eral for mi­cro-pru­den­tial su­per­vi­sion at the Euro­pean Cen­tral Bank 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.

"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 Euro­pean Cen­tral Bank 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 Euro­pean Cen­tral Bank 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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