By Huw Jones
LONDON (Reuters) – This year’s European Union bank stress tests should not automatically trigger cuts to dividends and bonuses if they reveal capital shortfalls, the bloc’s banking watchdog said on Friday.
The announcement aims to help restore investor confidence in Europe’s banking sector, where valuations lag those in the United States, partly due to uncertainty over capital requirements.
The European Banking Authority (EBA) is coordinating a stress test of 51 lenders from across the 28-country bloc with the results due on July 29.
For the first time, there will be no pass or fail mark.
The EBA sought on Friday to clear up confusion over how the tests’ findings will feed into broader “SREP” reviews of bank capital by supervisors such as the European Central Bank.
The ECB supervises the euro zone’s top lenders and is looking at whether banks need extra capital under a supervisory review and evaluation process, or SREP.
It considers how much extra capital a bank should hold on top of its mandatory minimum requirements, and helps to formulate “capital guidance” for each bank.
The EBA said on Friday that this capital guidance should be set above the combined level of mandatory minimums and add-ons.
However, capital guidance does not constitute any form of binding capital requirements, and therefore is not expected to trigger automatic restrictions on payouts to investors, it added.
This makes clear that it is up to the supervisor to decide if dividends should be suspended.
“In the new regulatory framework it is essential that supervisors provide clarity as to how their requirements could affect the treatment of investors, including possible constraints to payments,” EBA Chairman, Andrea Enria, said in a statement.
Supervisors like the ECB will “monitor the capital guidance and the way it is integrated into institutions’ risk management and capital planning processes,” the watchdog added.
(Reporting by Huw Jones; Editing by Susan Fenton)