<p>The reason for the ECB to limit dividend payments is to preserve bank capital, to ensure safety and soundness of the banking system at a time of stress.  Remember that when banks pay dividends , the capital base is reduced.   If that happens at the same time that banks have to make provisions against bad loans , taxpayers could be at risk from bank bailouts.</p>

CC BY-SA 4.0
2020-12-29T02:42:31.990Z
2020-12-29T02:42:31.990Z
dm63
<p>Because of the way fractional reserve banking works, any private bank can give out loans until the total amount of debt created is several times the amount of cash they have in reserves. Therefore, we can say that commercial banks are &quot;creating money&quot; by issuing debt.</p>
<p>Right now, due to the COVID-19 pandemic all central banks are desperately trying to increase the money supply since there is less money flowing in the economy because of lock-down restrictions (there is less money moving around since people cannot consume as much).</p>
<p>What the ECB wants is for the commercial banks to keep as much money in reserves as possible. That will make them more capable of giving out loans. Thus, helping them increase the money supply.</p>
<p>If you are interested in how fractional reserve banking works, there are some really nice Khan Academy videos about it: <a href="https://youtu.be/nH2-37rTA8U" rel="nofollow noreferrer">https://youtu.be/nH2-37rTA8U</a></p>
<p>As to why banks want to resume shareholder payout, that's more to do with corporate politics. And, although the situation of every corporation might be different, at the end of the day the CEO needs to keep the board of directors happy since they have the decision to fire her/him.</p>

CC BY-SA 4.0
2020-08-01T00:15:09.580Z
2020-08-01T00:15:09.580Z
logic_gaps
<p>In the wake of the Covid-19 pandemic, the ECB requested EU banks not to pay dividends as well as refraining from buying back their own shares until the end of 2020. And that even if they had already set cash aside for future loan losses.</p>
<p>Banks however are lobbying for a resumption to shareholder payouts. Presumably because their stocks have been hit hard by the cancellation  of dividends (among other things).</p>
<p>Buybacks (allowed since 1982) can be  a hot political topic, scrutiny is imposed around them. They can affect a companies EPS and therefore executive rewards.</p>
<p>Why is the ECB asking EU banks to hold off on buybacks?  And why is it so important for banks to resume shareholder payouts ? What, in effect, is impact the payout (E.g. impact different if payout is 10% of banks profit VS 50% ) ?</p>

CC BY-SA 4.0
2020-07-31T11:21:20.497Z
Both dividends and stock buybacks reduce the assets of banks (equity if you prefer).  The ECB would prefer to see banks protected against loan defaults in the recession and able to make new loans; a reduction in assets might make that harder
Henry
<banking><central-banking><corporate-finance>
Why is the ECB asking EU banks to hold off on buybacks?
DKK
# Why is the ECB asking EU banks to hold off on buybacks?

(Asked by: username_0 on 2020-07-31)

In the wake of the Covid-19 pandemic, the ECB requested EU banks not to pay dividends as well as refraining from buying back their own shares until the end of 2020. And that even if they had already set cash aside for future loan losses.

Banks however are lobbying for a resumption to shareholder payouts. Presumably because their stocks have been hit hard by the cancellation of dividends (among other things).

Buybacks (allowed since 1982) can be a hot political topic, scrutiny is imposed around them. They can affect a companies EPS and therefore executive rewards.

Why is the ECB asking EU banks to hold off on buybacks? And why is it so important for banks to resume shareholder payouts ? What, in effect, is impact the payout (E.g. impact different if payout is 10% of banks profit VS 50% ) ?

**Tags:** banking, central-banking, corporate-finance

> **Comments:**
> **username_1**: Both dividends and stock buybacks reduce the assets of banks (equity if you prefer).  The ECB would prefer to see banks protected against loan defaults in the recession and able to make new loans; a reduction in assets might make that harder  

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## 2 answers

### Answer by username_2 on 2020-12-29. Score: 1

The reason for the ECB to limit dividend payments is to preserve bank capital, to ensure safety and soundness of the banking system at a time of stress. Remember that when banks pay dividends , the capital base is reduced. If that happens at the same time that banks have to make provisions against bad loans , taxpayers could be at risk from bank bailouts.


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### Answer by username_3 on 2020-08-01. Score: 0

Because of the way fractional reserve banking works, any private bank can give out loans until the total amount of debt created is several times the amount of cash they have in reserves. Therefore, we can say that commercial banks are "creating money" by issuing debt.

Right now, due to the COVID-19 pandemic all central banks are desperately trying to increase the money supply since there is less money flowing in the economy because of lock-down restrictions (there is less money moving around since people cannot consume as much).

What the ECB wants is for the commercial banks to keep as much money in reserves as possible. That will make them more capable of giving out loans. Thus, helping them increase the money supply.

If you are interested in how fractional reserve banking works, there are some really nice Khan Academy videos about it: <https://youtu.be/nH2-37rTA8U>

As to why banks want to resume shareholder payout, that's more to do with corporate politics. And, although the situation of every corporation might be different, at the end of the day the CEO needs to keep the board of directors happy since they have the decision to fire her/him.


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