European Central Bank recommends conservative dividend policies

On February 13, 2015, a European Central Bank Recommendation on dividend distribution policies was published in the Official Journal of the European Union.

All banks are ranked under three categories entirely depending on their level of protection against unexpected losses. These categories determin the particular policy the banks are recommended to follow regarding the distribution of dividends.

As we know, the evaluation of the banks’ level of protection follows three ratios for which specific targets have been se by the Capital Requirements Directive (CRD IV): Common Equity Tier 1 ratio (4.5%), Tier 1 Capital ratio (6%) and Total Capital ratio (8%).

Under the ECB’s recommendation, the category one includes banks that have achieved their transition towards the new objectives set by BASEL 3 and have therefore complied with the previously mentioned ratios. These companies may distribute dividends from net profits but in a conservative manner taking into account the current challenging economic and financial conditions as to ensure their continuous compliance.

If banks have not yet reached the final objectives but are in line with intermediary ones, they will fall under category 2, which enables the distribution of net profits as dividends so long as it doesn’t prevent them from reaching their objectives in time. In practice, this means that over a period of four years, credit institutions should in principle retain at least 25% per year of the gap towards their fully loaded Common Equity Tier 1 capital ratio, their Tier 1 capital ratio and their total capital ratio.