(Bloomberg) -- Several bank regulators dissatisfied with the European Central Bank’s tough stance on shareholder payouts are getting ready to push for a relaxation, arguing it’s partly to blame for the poor valuations of the region’s lenders.
The officials, who sit on the ECB’s Supervisory Board and have long disagreed with the line taken by Chair Andrea Enria, want to lower the capital bar that individual banks have to meet for payouts and scrap a time-consuming approval process for share buybacks, according to people familiar with the matter.
The regulators view the departure of Enria at the end of the year as an opportunity to lobby for a less restrictive approach under his successor Claudia Buch, they said, asking to remain anonymous as the matter is private. They’ll have to overcome opposition from other board members who want to maintain the status quo.
An ECB spokesman declined to comment.
Shareholder payouts have long been a key point of contention between the ECB and banks in the region, which are struggling to win back investors after years of meager distributions when they were forced to build up capital reserves following the 2008 financial crisis. While the industry has recently benefited from a surge in interest rates that has allowed many banks to raise payout pledges, most lenders still trade at a steep discount to their Wall Street peers.
The 23-member Euro Stoxx Banks Index rose 0.6% at 10:31 a.m. in Frankfurt, to the highest since March 9. That’s the day before the failure of Silicon Valley Bank in the US helped spark a wider slump in global banking stocks.
The ECB has said it plans to conduct a review of its supervisory processes next year, presenting an opportunity for the debate on capital distributions. Buch, who is currently vice president of the Bundesbank, will probably prove decisive in a difficult discussion, said the people.
Proponents of more flexibility say they have the impression she will at least be open to debate as part of the scheduled wider review. Yet people who have worked with Buch say her previous approach to bank capital has been hawkish and doesn’t suggest she will loosen the reins.
A Bundesbank spokesman declined to comment on behalf of Buch. In her current role, the central banker last week defended €24 billion ($26.4 billion) of capital buffers that German banks have been forced to build to help weather a potential economic downturn.
Around the world, payouts are a regular source of conflict. Regulators want lenders to hold onto capital to survive losses in a downturn, while banks see payouts as a way to attract more investors and lift the share price. In Europe, trust on both sides has been eroded by overly cautious warnings by the ECB during the pandemic as well as governance shortcomings at banks.
The ECB has allowed banks to distribute capital they built up during its pandemic-era restrictions and several lenders are delivering on multi-year plans to pay out billions of euros more. Yet many European banks still trade below their book value as investors question whether their returns will be eroded by taxes or otherwise limited by regulators.
It isn’t clear whether payout doves will be able to sway their colleagues on the supervisory board. Several senior regulators told Bloomberg they are concerned that a laxer approach would risk draining too much capital from the banking system. Some argue that the ECB needs to retain a degree of flexibility, citing uncertainty over how the economy will fare.
Other officials say privately that the ECB is partly to blame for the low valuations and agree with the banks that they need to be attractive to investors in case they have to raise fresh capital. They also say a ban on payouts at the height of the pandemic still weighs on investors’ minds.
Enria has stressed that those restrictions were temporary. Banks can pay out excess funds if they can continue to meet the ECB’s capital requirements “in a sufficiently conservative adverse scenario,” he said in an interview with Bloomberg in September.
That isn’t transparent and provides the ECB with too much leeway to lean on banks to shrink payouts, say the proponents of a laxer approach. They want lenders to be able to distribute capital in excess of their requirements, including a non-binding buffer the ECB refers to as “guidance.”
Another way to help banks lift valuations would be to scrap formal approval processes for big share buybacks, which are currently escalated to the top of the ECB’s supervisory arm, these people say. Instead, the teams of supervisors assigned to each bank would review such plans as part of their regular assessments of capital levels, they said. That would help banks become quicker in repurchasing stock to take advantage of dips in their share prices, said the people.
In a joint interview with several European newspapers, Enria said the ECB’s actions on payouts have been consistent with its communications.
“I clearly said that after the pandemic we would go back to the business-as-usual assessment of individual, bank-by-bank capital trajectory processes and distribution plans, which is what we have done,” he said in a transcript of the interview published on the ECB’s website on Wednesday. “Banks are distributing plenty of money via buybacks and ordinary dividends. I hope the trust in what we have committed to do will be restored.”
Buch hasn’t waded into the debate publicly, beyond stressing the importance of financial reserves for banks in general.
“Strong supervision must ensure that banks are well governed and have sufficient capital and liquidity buffers,” she told European Parliament lawmakers in September.
(Updates with market reaction in sixth paragraph)
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