Should Banks Pay Dividends in 2021?

Well-performing European banks are allowed again to pay out dividends to their shareholders this year. However, according to Clemens Kool, Professor of Macroeconomics and International Monetary Economics, this requires a careful balancing act. Banks are private companies, so if they have high buffers and make a profit, it is difficult for the ECB to prohibit them from paying dividends. In such cases, a tailored approach, as Kool outlines in this interview, can offer a solution. “If a bank pays out a dividend because things are going quite well, but gets in trouble six months later, they return to the ECB for help.”

Supervision is already aimed at keeping an eye on the financial position of banks, says Kool. A poor cash position can be a reason for a bank to build up more buffers. In January 2021, the ECB banking supervisor again extended the strong recommendation to banks to NOT pay out cash dividends or to use share buyback programmes. The goal of this recommendation is to keep the bank’s capital buffers as high as possible in the ongoing pandemic. The extension holds till September 2021 and the ECB has stated it expects the recommendation to be repealed by then.

It is a recommendation, so banks that are sufficiently strong and profitable can still pay out dividends, but need prior approval of the supervisor.