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ECB asks banks to rethink dividends amid recession risk

Eurozone lenders planning their next dividend payouts should consider the possibility of a gas shortage or a recession when making their calculations, the European Central Bank said Thursday, as the economic outlook darkens.

Russia’s war in Ukraine has already pushed up energy and food prices, and concerns are growing that Moscow could tip the eurozone into a recession should it decide to fully withhold natural gas supplies.

Although eurozone banks have pretty strong capital buffers thanks to reforms made after previous crises, the ECB wants lenders to prepare for stormy times.

“We will propose to ask banks to recalculate their capital trajectories under a more adverse scenario including also potentially a gas embargo or a recession,” said Andrea Enria, the ECB’s bank supervisor.

The ECB would then use those calculations “for the purpose of vetting their distribution plans”, Enria told a European Parliament committee in Brussels.

The topic will be discussed at a meeting of the ECB’s supervisory board next week, Enria added.

The proposal stops short of ordering banks to freeze dividend payments to shareholders, as the ECB did in March 2020 at the start of the coronavirus pandemic.

The restriction, which also applied to share buy-backs, sought to ensure lenders had enough liquidity to weather the fallout.

The curbs were eased a few months later and fully lifted last September, although the ECB asked lenders to remain “prudent”.

The ECB recently slashed its 2022 growth forecast for the 19-nation eurozone.

It now expects the economy to expand by just 2.8 percent, compared with 3.7 percent in March when the impact of Russia’s invasion of Ukraine had yet to be felt.

Eurozone inflation is expected to surge to 6.8 percent this year, well above the ECB’s two-percent target.

The ECB plans to hike interest rates next month for the first time in over a decade to tame rising prices, following in the footsteps of other major central banks.