Bank investors in Europe are breathing a sigh of relief after the Continent's top bank regulator loosened a de facto restriction on dividends paid by lenders. The European Central Bank (ECB), the monetary authority of the 19 countries that have adopted the euro, has issued a recommendation that banks should again pay dividends if they had the means to do so.

That recommendation carries a caveat, though. The ECB said in a statement that it "expects dividends and share buy-backs to remain below 15% of the cumulated profit for 2019-20 and not higher than 20 basis points of the Common Equity Tier 1 (CET1) ratio, whichever is lower."

It would like the banks to hold to this policy through next September.

A partially opened bank vault.

Image source: Getty Images.

The current ban on bank dividend payouts started in March, when the coronavirus started to spread quickly. Originally, the ECB had requested banks to halt these disbursements only through October; it subsequently extended this recommendation.

Although the ban isn't legally enforceable as such, the ECB's policy recommendations are generally followed by banks in the member states. It is likely that the affected lenders will continue to follow the guidelines and declare modest dividends, if at all.

The ECB's ban is reminiscent of a similar policy enacted by the U.S. Federal Reserve in June, in which it suspended share repurchases entirely, and capped dividend payments.

While some banks were able to maintain their distributions, others were forced to trim them, at times substantially. Wells Fargo (NYSE:WFC) announced a steep 80% cut to its payout in July, although it has to be said that the bank was struggling even before the pandemic hit. Wells Fargo has not yet managed to lift its dividend from that greatly reduced level.

 
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