Impact of payout restrictions in the wake of the COVID-19 pandemic on European and US banks´ market valuation

Banking prudential authorities in a large number of jurisdictions restricted payouts after the onset of the COVID-19 pandemic, with the aim of bolstering organic capital generation and strengthening banks’ solvency. This paper analyses whether market reactions around the dates of the announcements of restrictions in 2020 by the main authorities in Europe and the United States were significant, using the event study methodology on bank excess returns. The results show evidence of negative excess returns only after some of the announcements by the European authorities in 2020, and uneven reactions to the different announcements are observed at individual bank level. In particular, the negative impact is confined to certain sub-samples of European banks around the first announcement of the European Central Bank (ECB) recommendations limiting dividend distributions and share buybacks. The cumulative excess returns that correlated more closely with bank characteristics were those in response to this announcement, with larger banks and banks with a lower CET1 ratio being those most affected. Results for the subsequent announcements do not show significant negative excess returns, and the analysis shows that other available information gradually prevailed over the informative content of the communications of payout restrictions themselves.