New recommendation by FIN-FSA on distribution of credit institutions’ profitsThe FIN-FSA recommends that credit institutions under its direct supervision exercise extreme prudence in profit distribution paid in cash until 30 September 2021. The recommendation also applies to buy-backs and redemptions of shares in circumstances where the purpose of such buy-backs and redemptions would be the distribution of profits. This recommendation supersedes the recommendation issued on 28 July 2020 (Supervision release 29 July 2020 – 46/2020). The recommendation applies to credit institutions on their highest consolidation level.
Decision-making on profit distribution by credit institutions under the FIN-FSA’s direct supervision must be based on realistic assessments of their ability to maintain a sound capital base. Such decisions must take into account the effects of the uncertain economic conditions on the credit institutions’ risk exposures and capital.
The decision is based on a Recommendation issued by the European Central Bank on 15 December 2020, in which it recommends credit institutions under its direct supervision to exercise extreme prudence in their profit distribution for financial periods 2019–2020 until 30 September 2021. The FIN-FSA recommends that when credit institutions define what constitutes prudent profit distribution, they apply comparable criteria to those presented by the ECB in its Recommendation to credit institutions under its direct supervision. According to the ECB’s criteria, profit distribution by credit institutions should be limited to:
- no more than 15% of the credit institution’s accumulated profit for the financial years 2019 and 2020; and
- no more than 0.2 percentage points of the credit institution’s CET1 ratio.
The ECB Recommendation applies to credit institutions under direct ECB supervision. The ECB recommends that national supervisory authorities also apply a similar recommendation to other credit institutions, to the extent they deem appropriate.
The FIN-FSA also recommends that credit institutions under its supervision exercise great moderation in deciding on variable remuneration in circumstances where remuneration could lead to an impairment in the credit institution’s prudential position. The ECB has also presented a corresponding recommendation to the Chief Executive Officers of credit institutions under its supervision in a letter dated 15 December 2020.
The European Banking Authority (EBA) has also issued a statement on 15 December 2020 calling for a conservative approach on profit distribution and to apply extreme caution therein.
- ECB Recommendation on profit distribution of 15 December 2020
- ECB Letter to CEOs of 15 December 2020
- ECB press release of 15 December 2020
- EBA press release of 15 December 2020
Previous supervision releases aimed at credit institution under direct FIN-FSA supervision:
- Supervision release of 28 July 2020 – 46/2020
- Supervision release of 30 March 2020 – 12/2020
- Supervision release of 28 March 2020 – 11/2020
Previous FIN-FSA press releases on the recommendation concerning profit distribution
- Press release of 28 March 2020:FIN-FSA issues recommendation to supervised banks to refrain from dividend distributions - yesterday evening the ECB published a corresponding recommendation to banks under its direct supervision
- Press release of 28 July 2020: Financial Supervisory Authority extends the validity of its profit distribution recommendation until 1 January 2021 and clarifies expectations related to capital and liquidity buffers