Follow-up of the ESRB's recommendation on restrictions on dividend distributions, etc.
Published: 21 December 2020
In a letter to the Ministry of Finance on 21 December, Finanstilsynet has given its assessment of how the recommendation should be followed up in Norway.
On 18 December, the European Systemic Risk Board (ESRB) issued a new recommendation to national authorities to request banks and insurers to refrain from making dividend distributions etc. until 30 September 2021, unless the institutions apply extreme caution and the distributions do not exceed the conservative thresholds set by the national supervisory authorities. The recommendation is based on the continued uncertainty about the future impact on economies and financial institutions of the ongoing crisis resulting from Covid-19.
Finanstilsynet agrees with the ESRB’s assessments. The shock to the economy and the markets caused by the Covid-19 crisis is of a totally different nature than previous shocks, which makes it harder to predict how it will affect financial institutions.
In the light of this uncertainty, it is crucial that banks retain their equity and that any distributions in the form of dividends, etc. are strongly restricted and based on conservative assumptions about future losses and capital needs.
In Finanstilsynet’s opinion, it is logical to keep in mind the thresholds set by other supervisory authorities in the EEA when setting thresholds for distributions, etc. In its letter to the Ministry of Finance, Finanstilsynet gives a further description of the thresholds it thinks should be applied.
In Finanstilsynet’s assessment, Norwegian banks that apply extreme caution and, based on the ESRB's recommendation, find that distributions are warranted, should limit total distributions to maximum 25 per cent of cumulative annual profits for 2019 and 2020. Any distributions within this threshold include any form of distribution that has already been made or approved in 2020, as well as distributions made or approved up until 30 September 2021. Distributions include all dividend payments on shares and equity certificates, customer dividends, gifts and repurchases of equity instruments.
With respect to insurers, Finanstilsynet supports the request by the European Insurance and Occupational Pensions Authority (EIOPA) that insurers maintain a cautious and prudent approach to profit distributions. Finanstilsynet does not recommend that a general threshold be established for distributions from insurers.
All profit distributions from financial institutions must be assessed in the context of the institution’s financial position. Pursuant to Section 10-6 of the Financial Institutions Act, Finanstilsynet may, when necessitated by a financial institution's financial position, order the institution not to make dividend payments.
Furthermore, Finanstilsynet expects the institutions to continue to exercise caution when determining all variable remuneration, in line with the ESRB's recommendation.