(Bloomberg) -- Europe should extend its de-facto ban on bank dividends by six months, a top official at the European Central Bank’s supervisory arm said, casting a shadow over investors’ hopes for a return to payouts early next year.The comments come as big banks across Europe are facing fraught times, with regulators at the ECB and the Bank of England preparing to decide in coming weeks whether and how to lift their recommendations on payouts. Shareholder dividends were effectively frozen in March in a trade-off for unprecedented regulatory relief and government loan guarantees, yet bankers have subsequently slammed them as doing more harm than good.Speaking in an interview ahead of the long-awaited decision this month, Ed Sibley, a member of the ECB’s supervisory board, said continued uncertainty, a need to preserve capital for lending and reputational issues for banks all speak in favor of extending the regulator’s existing recommendation. The question is how to implement it in practice, because the ECB doesn’t have the powers to enforce a blanket ban over mounting objection by lenders.“Overall, we would be better if we were to hold off for another six months,” said Sibley, who is also a deputy governor at the Central Bank of Ireland. “Whether we can practically do that is a real challenge.”European banking stocks pared gains on Friday, with the 22-member Euro Stoxx Banks Index up 0.9% as of 4:52 p.m. in Frankfurt after earlier rising 2%. The index has fallen 19% this year with Banco de Sabadell SA, ABN Amro Bank NV and Societe Generale SA among the biggest losers.The BOE and ECB have said they will announce their decisions on dividends by the end of the year. The ECB will release its economic projections on Thursday, providing a key input for regulators, alongside its latest monetary policy decision. The BOE publishes its Financial Stability Report the next day.“That will factor into our thinking, but there are lots of other things we need to think about as well,” said Sibley. “There are significant weaknesses in lots of banks’ ability to demonstrate to us that their planning is effective from a capital management perspective.”The ECB recommended earlier this year that banks not pay dividends or buy back shares at least through the end of 2020. The central bank doesn’t have the legal basis to issue a blanket ban, yet big banks fell in line after chief watchdog Andrea Enria said he could impose legally-binding measures on an individual basis.As the pandemic progressed and lenders largely managed to deal with the fallout, some of the banks hardest-hit by the dividend suspension have become more vocal in demanding a return to payouts. Many have seen their share prices erode this year, especially when compared with the U.S., where the Federal Reserve only demanded a cap on capital returns.‘Middle’ Ground“We didn’t ban dividends, we expressed our view on them and I think that’s as far as we can go this time,” Sibley said. “You have to think about how would we implement something that is practical and will stand some degree of challenge. I think that’s where we’re having the debate.”Other options floated by central bankers have been to allow only the strongest banks to return funds to shareholders.That approach is also complicated, according to Sibley. It encourages banks to prioritize investors’ short-term interests over their longer-term financial health and risks disclosing non-public information about how the ECB views the governance failings of certain lenders, he said.“That leads to another collective action problem or system-wide problem versus the individual incentive,” he said. “Overall, I think we’d be better off waiting. Practically, I don’t know how that’s going to be achievable so we’re going to have to come up with something that sits in the middle.”(Updates with banking shares in fifth paragraph, comment on capital planning in seventh.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.