On 10 January 2019, the European Central Bank (ECB) published a recommendation on dividend distribution policies. The ECB has also published a letter that it has sent to credit institutions concerning variable remuneration policy.
The letter note that, as with dividend distribution policies in the recommendation, an institution’s variable remuneration policy may have a significant impact on its capital base. The ECB urges institutions to consider the potentially detrimental impact of their remuneration policy on maintaining a sound capital base, especially taking into account the transitional requirements set out in the CRD IV and the transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds pursuant to Article 473a of the CRR.
The ECB recommends that institutions apply a remuneration policy that is consistent with a conservative – at a minimum, linear – path towards their fully loaded capital requirements (including the combined buffer requirement) and outcomes of the Supervisory Review and Evaluation Process (SREP). In a similar vein, credit institutions should also establish dividend policies using conservative and prudent assumptions in order, after any distribution, to satisfy the applicable capital requirements and the outcomes of the SREP.