The European Central Bank will apply new European Commission guidelines on bank capital that raise the bar for stopping lenders from paying bonuses, dividends and discretionary coupons, the ECB's chief supervisor said on Wednesday. The Commission proposal, outlined in a document seen by Reuters, pared back the freedom for manoeuvre of supervisors such as the ECB in stopping banks from distributing profits to investors or staff.
The document clarified that these distributions would only be banned when a lender's capital level fell below the legal requirement. Previously this was a grey area, leaving bank watchdogs more discretion. Daniele Nouy, chair of the ECB's supervisory board, said she welcomed the Commission's clarification and hoped it could converted into legislation.
"We think that it may be useful and we will consider how to implement it. This is a work in progress," Nouy said. "I think clarity regarding the maximum distribution amount ... should be in legislation." The Commission document said supervisors could give further "guidance" to a bank about its capital, but failure to follow this advice would not result in a ban on paying out profits.
It also said that holders of convertible bonds "may deserve particular protection" because, unlike staff members and shareholders, they cannot be compensated for missed coupons. The European Union's financial services chief, Jonathan Hill, has been an advocate of easing rules on banks to stimulate lending and foster the economic recovery. The ECB's Single Supervisory Mechanism, which scrutinises the euro zone's largest banks, on the other hand has insisted on higher capital requirements and on strict monitoring of risks such as big piles of bad loans.
Asked about the proposed merger between Banco Popolare and Banca Popolare di Milano, on which the ECB is seeking further clarification, Nouy said the ECB's response does not depend on a business plan being submitted. "The Supervisory Board asked for a business plan and still wants to receive one but it's not a precondition for moving forward with the discussions," she said. "Probably there will be a response before receiving the business plan."
Banco Popolare and BPM have been in negotiations for months over a tie-up that would create Italy's third biggest bank. But a deal has stalled due to ECB demands for stronger capital and a simpler structure, with some bankers close to the talks saying conditions have been so stringent that the two banks considered abandoning the deal. Nouy said the ECB's conditions depend on the size and combined risks of the bank the merger would create. "We are asking to the banks exactly what we would be asking to any other bank in any SSM country provided it presents the same size and risk profile," Nouy said.