As part of efforts to mitigate the adverse economic effects of the pandemic since the outbreak of COVID-19, financial sector supervisory authorities have taken measures to restrict capital distributions to shareholders by banks (and other financial intermediaries). While differing in form and manner, this trend arose in like manner throughout most jurisdictions. Banks, regardless of their capital standing, were required to withhold capital on a prudent basis in an effort to improve financial support provisioning to the economy as the pandemic crisis unfolded. 

The European Systemic Risk Board (ESRB), from its macro-prudential perspective, and the European Central Bank (ECB), as supervisory authority for Eurozone banks, have issued recommendations, first urging banks not to distribute any dividend and then limiting distributions to a pre-set threshold until September 30, 2021. In the UK, the Prudential Regulation Authority (PRA) published a statement welcoming the decision to suspend the distribution of dividends and share buy-backs until the end of 2020 and later set out guardrails for distributions to ordinary shareholders in relation to full-year 2020 results. Likewise, the Federal Reserve prevented the largest US banks from buying back shares and capped the amount of dividend distributions until June 30, 2021.

Given the ongoing post-pandemic economic recovery, prudential authorities are all reconsidering these measures; the Federal Reserve was the first to replace the general ban with specific assessments, carried out in light of each bank’s specific conditions. The UK PRA closely followed: on July 13, 2021, it  removed the extraordinary guardrails referred to above, with immediate effect.

As the deadline for the renewal of the various restrictions is approaching, a debate is under way also in the EU as to whether the pandemic-triggered limitations on shareholder distributions should be maintained, revised or repealed and, specifically, as to whether further binding powers should be granted to the relevant authorities. This debate is even more significant in light of the specific mandate given to the EU Commission on this topic by the new Article 518(b) CRR - ‘Report on Overshooting and Supervisory Powers to Restrict Distributions’, enacted by the so-called ‘CRR quick-fix’ regulation. Article 518(b) CRR  provides that, by 31 December 2021, the Commission shall report on whether exceptional circumstances that trigger serious economic disturbance in the orderly functioning and integrity of financial markets justify, 'during such periods, granting additional binding powers to competent authorities to impose restrictions on distributions by institutions. The Commission shall consider further measures, if appropriate’. 

In our article ‘Restriction for bank capital remuneration in the Pandemic: A Lesson for the Future or an Outright Extraordinary Measure?’, recently published in the European Banking Institute’s ebook ‘Financial Stability amidst the Pandemic Crisis: On Top of the Wave’ (EBI, CV Gortsos and WG Ringe (eds)) we reflect upon three issues.

First and foremost, our attention focuses on the role of shareholder interests in banks. Although opinions differ on how to balance the interests of shareholders and stakeholders in the governance of companies in general, and banks in particular, shareholders’ expectations for a return on their investment through dividend payments and share repurchases cannot be overlooked. The remuneration of equity capital through distributions to shareholders is an essential feature of company law and plays a crucial role in enabling companies in general to raise  the external capital needed for their business activities and more specifically, in the case of banks, to have sufficient own funds for prudential purposes. Any divergence from this principle must therefore be duly and specifically justified. 

Secondly, we highlight the difference between the regulatory limits and supervisory powers to restrict shareholder distributions in 'normal-times' bank regulation and the dividend restrictions enacted in the pandemic context. While the ordinary restrictions stem from a microprudential perspective and aim at enhancing the capital position of a specific bank to ensure compliance with capital adequacy requirements, the measures enacted during the pandemic lie on a different footing and meet a macroprudential, if not macroeconomic, approach. The rationale is that it is essential that the banking intermediation function be carried out even in extraordinary circumstances and that financial support for the economy is boosted to the highest level when necessary to avoid a collapse of the entire system. When considering whether to introduce a general power to issue dividend restrictions, the link between such new powers and existing supervisory limits should be thoroughly investigated. Given the extent and nature of such new powers, careful consideration should also be given to the distribution of such new powers among the authorities operating within the EU supervisory framework

Finally, public intervention in limiting the distribution of dividends and the possible granting of additional general powers to public authorities raises questions about the perceived effectiveness of bank corporate governance. Bank governance rules require boards to provide for the safe and sound management of a bank and  to take into account all the interests related to the conduct of the banking business, including the collective ones. Nevertheless, during the pandemic financial institutions relied on the intervention of public authorities in order to refrain from or limit shareholders' distributions. Granting public authorities a blanket power to limit or ban shareholders' distributions in order to protect collective interest, therefore, might further undermine the perception of the role and responsibilities that bank boards are expected to take on.

All these three points must, in our view, be carefully addressed when determining whether to finalize measures granting competent authorities additional binding powers to set general restrictions on banks' distributions to shareholders. 

In our opinion, there is no need to grant public authorities general, permanent powers to limit or suspend distributions to shareholders, even subject to exceptional circumstances. Such powers could, in fact, adversely affect the perception of investors regarding the ability of banks to ensure a return on investment and, therefore, hinder the raising of external capital. As the Covid-19 experience has shown, in case of extraordinary situations, ad hoc provisions can always be adopted to protect, in a more flexible way, the collective interests associated with banking. A more flexible approach would also be more consistent with the role attributed to bank governance in the current regulatory environment.


Antonella Sciarrone Alibrandi is Full Professor of Banking and Capital Markets Law, Università Cattolica del Sacro Cuore, Milan. 

Claudio Frigeni is Full Professor of Business Law, Università Cattolica del Sacro Cuore, Milan.


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