In its 8 April 2020 statement, the Financial Supervision Committee (FMEN) introduced its priorities for financial supervision during the COVID-19 pandemic. The FMEN agreed with the European Banking Authority’s (EBA) 31 March 2020 statement and the European Insurance and Occupational Pensions Authority’s (EIOPA) 2 April 2020 statement, in which the two institutions recommended that financial institutions and insurance companies emphasised maintaining a strong capital position during highly uncertain times – among other things, by refraining from paying dividends, buying their own shares, and paying bonuses or other variable remuneration.
The FMEN has now published amended guidelines on financial institutions’ and insurance companies’ dividend payments and purchases of their own shares, which remain in effect through 30 September 2021. Among other things, the amendments reflect the European Systemic Risk Board’s (ESRB) statement of 15 December 2020. In that statement, it is recommended that relevant authorities request financial institutions under their supervisory remit to refrain until September 30 2021 from making dividend distribution, buying back ordinary shares and creating an obligation to pay variable remuneration to a material risk taker. The EBA issued a similar statement that same day.
Near-term economic developments are highly uncertain, and there is abundant reason to maintain a strong capital position. As a result, the FMEN agrees with the aforementioned statements from the ESRB and the EBA and stresses that financial institutions should observe maximum prudence as regards their capital position. In this context, attention is drawn to the FMEN statement of 22 September 2020, announcing that the results of the 2019 supervisory review and evaluation process (SREP) assessment concerning additional capital requirements for systemically important banks should remain unchanged despite increased risk and uncertainty in connection with the pandemic.
The FMEN does not object to the payment of dividends or the purchase of own shares but urges financial institutions to be guided by the following considerations when taking decisions on such transactions:
- The financial institution’s operating results for the prior accounting year were positive, and projections concerning developments in capital indicate a strong capital position for the coming three years. It is recommended that the institution’s assessment of both of these be reported to FSA Iceland in a timely manner.
- The amount of dividend payments or purchases of the institution’s own shares does not exceed 25% of the institution’s aggregate after-tax profit for 2019 and 2020, or a 0.4 percentage point reduction in common equity Tier 1 capital, whichever is lower.
The FMEN also urges insurance companies to observe the utmost prudence in their capital management, owing to the economic uncertainty prevailing because of the pandemic. The FMEN agrees with EIOPA’s 18 December 2020 statement concerning the risk insurance companies are facing and urges insurance companies to observe caution in taking decisions to pay dividends and buy their own shares. When deciding on dividend payments and purchases of their own shares, insurance companies must consider their solvency margins. While the uncertainty persists, FSA Iceland will monitor the situation closely to determine whether insurance companies’ risk assessments and solvency margin assessments are sufficiently cautious and forward-looking.
This news item was originally published by the Central Bank of Iceland (CB IS). For more information, please see the Source Link.