Scander Bentchikou (Lazard Frères Gestion) | The restrictions on bank dividends, which have been in force since March 2020, ended on Friday. For banks and their shareholders, this is a relief. The measure, supposed to protect banks from the crisis, has done more harm than good. Technically, the banking sector’s dividends made a big comeback in spring 2021. However, the amounts paid remained well below their 2019 levels, given the still numerous restrictions. The return to normal will have to wait for the results of the banking stress tests, published on 31 July by the European Banking Authority.
Peter Allen Goves (MFS Investment) | The need to avoid premature tightening by the ECB and the strengthened guidance is supportive for core rates in our view. The strong association of guidance with the inflation outlook will also probably raises the prominence of the projections. Overall, the new guidance reinforces the ECB’s commitment to maintain accommodation to reach its price stability aim. Given that projections remain below target, this means…
On the otther hand, the European Central Bank warns that it will monitor excessive bank dividends. On the otther hand, the European Central Bank warns that it will monitor excessive bank dividends.
Laura Becerra (Caixabank Research) | If we want to get a better understanding of monetary policy decision-making, we must pay close attention to changes in financial conditions. To do this, there is an important initial step: knowing how to measure them.
Javier García Arenas and Adrià Morron Salmeron (CaixaBank ) | The independence of central banks seems indisputable, even more so in these times of pandemic, in which they have increased their use of unconventional policies and provided coverage for the high funding needs of states. In this article we will explore the theory and empirical evidence supporting the importance for central banks to maintain their independence.
This Thursday could be a key moment for Europe, with the ECB meeting and the beginning of the European council. We could get a positive surprise on the time extension of PEPP, but the constraints on the “top-up” are significant. There is some tentative progress on the “rule of law” spat but hurdles abound. The Council meeting could bring about the denouement of the Brexit saga.
Lagarde couldn’t have been clearer that risks are now tilted to the downside and that the economic recovery was losing momentum. Given today’s meeting, we expect an expansion of PEPP and further policy measures clearly now cannot be ruled out.
The ECB is focusing on the proactive management of NPLs, linking the dividend policy to the impact of Covid19 on credit quality. Estimates suggest an increase in delinquency rates of up to €1.4 Tr in an adverse macro scenario, equivalent to 5.7% of the capital ratio. At a round table organized last week by the Bundesbank, Banco Santander chairman Ana Patricia Botín argued that the dividend veto is one reason why the banking sector is not sufficiently resilient “in terms of its ability to attract capital.”
The ECB has left its policy stance unchanged after today’s GC meeting. The tone of the press conference was a touch less dovish than expected and President Lagarde has not signaled any large swing in policy in the near term. The overall message was clear: the ECB is monitoring current developments (including the EUR) and assessing the efficiency of the current policy measures before acting with more accommodation
We do not expect ECB policy action this week, but guidance is that the ECB has its finger on the trigger for more PEPP (Pandemic Emergency Purchase Programme). Communication will not be easy, but EUR appreciation, record low core inflation and Fed policy should make for very dovish tones. We expect €500bn more PEPP in December, but inflation expectations urgently need attention too. Front-end rates will likely be supported by FX concerns, but credit risks are increasingly underpriced in by the market. Beyond verbal intervention, we think the ECB has limited options to weaken EUR for now.