We provide evidence that the ECB system-wide dividend recommendation (SWDR) ofMarch 2020 contributed to sustain lending, had a negative but moderate and transitory impacton bank stock prices and largely operated as a deferral of dividend payouts rather than as dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts forthis evidence and captures the key mechanism through which SWDRs operate to study thegeneral equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregatebank lending and mitigate the adverse impact of the COVID-19 shock on economic activity bysafeguarding euro area banks’ capitalization. Welfare-maximizing SWDRs stabilize the economyregardless of the shock type but they only induce significant welfare gains in response to financial shocks.