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5 banks face dividend cap as ECB finalizes capital thresholds

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5 banks face dividend cap as ECB finalizes capital thresholds

Five of the major eurozone banks directly supervised by the European Central Bank face caps on their dividend payouts in 2017 because they fall short of the capital thresholds set for them by the central bank, it said Dec. 15.

As it presented the results of its 2016 Supervisory Review and Evaluation Process, by which it sets bank-specific capital mandates, the ECB said the average common equity Tier 1 ratio required of lenders had remained unchanged for 2017 at 10.1% excluding any buffers tacked on for systemically important banks.

On average, however, the trigger below which dividend restrictions apply -- known as the maximum distributable amount, or MDA -- fell to an average of 8.3% in 2017 from 10.2% in 2016, as a result of a revision to the MDA framework, which means that so-called Pillar 2 guidance no longer counts toward the threshold.

Pillar 2 is the method used to assign banks their own capital targets, and was divided for 2017 into requirements and guidance. The required portion, which does count toward MDA, reflects qualitative information from stress testing, particularly around risk governance, but the capital depletion under a stress test adverse scenario is reflected only in the guidance portion.

Banks are still expected to meet their Pillar 2 guidance, but failure to do so no longer triggers automatic supervisory measures, instead being used in "fine-tuned measures based on the individual situation of the bank."

Other components of a bank's SREP requirement are the Pillar 1 minimum capital requirement applicable to all banks; a capital conservation buffer, designed to absorb losses while keeping CET1 capital above minimum levels; any countercyclical buffer, a measure applied to counterbalance the elevated risk presented by rapid credit growth; and any buffer assigned based on a bank's status as a global or other systemically important institution or by a national supervisor seeking to control systemic risk.

The ECB did not name the five banks that failed to clear their MDA trigger level. It will directly supervise 127 lenders in 2017; criteria include total assets of more than €30 billion or being one of a eurozone country's three most significant banks.

Separately, the ECB said its supervisory priorities for 2017 will include a focus on business model and profitability risks posed by Brexit and the emergence of financial technology, among others.

"The world has changed around us and so has the economic and regulatory sphere," said Danièle Nouy, chair of the ECB's supervisory board. "We will be taking a closer look at the effects on banks emanating from Brexit, the fintech sector and banking activities outsourced by banks."

The ECB also said it would focus more on specific asset classes and adopt a new approach that combines "on-site and off-site elements" when evaluating, for example, shipping loans. It will also launch a thematic review of banks' outsourced activities and management of associated risks, and complete thematic reviews on the potential impact of the implementation of IFRS 9 accounting standards and on how banks are complying with Basel Committee principles for aggregating risk data and reporting risks.

On-site missions for a review of how banks use internal models to calculate their Pillar 1 capital requirements will be launched in the first half of 2017. The review covers credit, market and counterparty credit risks.

On a macroprudential level, the ECB's governing council said Dec. 15 that it sees no need for a significant increase in countercyclical buffers across the eurozone, even given "limited signs that financial asset prices are stretched across financial markets."

"Cyclical systemic risks remain contained in most of the countries covered by ECB banking supervision and in the euro area as a whole, with the financial cycle slowly picking up," the council said.

It noted that real estate markets in some countries are continuing to recover from the financial crisis, but that in others rising prices or high household debt levels suggest a risk of growing imbalances. The European Systemic Risk Board in late November warned eight countries -- Austria, Belgium, Denmark, Finland, Luxembourg, the Netherlands, Sweden and the U.K. -- of "medium-term vulnerabilities" in their residential real estate sectors, although the governing council noted that most such countries have already started to strengthen macroprudential policies for the real estate sector.

Further targeted measures should be taken, it added.