Bank dividends: the IMF tightens the screw

Posted on Oct 25, 2020 at 3:53 PM

The end of restrictions on payments of bank dividends has not yet come. The second wave of the Covid-19 pandemic and its adverse consequences on the global economy require caution in the financial system. On Friday, the International Monetary Fund (IMF), in its semi-annual report on financial stability, expressed concern about the strength of banks’ capital and recommends, between the lines, not to loosen the screw on dividend distribution .

“Regulators should extend limits on banks’ capital distributions to help protect the financial system in the event that the global economic recovery proves slow,” the IMF said as quoted by Bloomberg. This recommendation comes just as some major lenders are eager to resume share buybacks and pay dividends.

According to the IMF, banking regulators should also act more quickly to reverse temporary financial system relief measures that undermine the reliability of financial reporting, or change global capital rules. And this even while other support measures for the financial system remain in place.

New pressures

The IMF’s recommendation risks dampening the hopes of those who expected that the restrictions due to the pandemic on capital distributions would, on the contrary, be lifted. Leaders of major American and European banks have made statements to this effect in recent weeks. They argue that they have accumulated enough capital to deal with the problems that could be caused by a slow economic recovery.

Thus, Jes Staley the boss of Barclays said, during a virtual conference organized on October 23 by the Institute of International Finance: “Being able to distribute excess capital is very important if the global economy in its together want to have confidence in its financial system. We have to keep this in mind. “

Except that the second wave of the epidemic has arrived. And concerns are growing about the ability of banks to withstand new economic pressures in a lingering health crisis.

In Europe, the European Central Bank (ECB) asked euro zone banks at the end of March to suspend all dividend payments for the 2019 and 2020 financial years as well as the share buyback programs at least until October 1. But in early September, the financial supervisor announced the review in December of the recommendation made to banks and said he was ready to soften his position. We can bet that the ECB will once again revise its position in the face of the cautious tone of the multilateral institution.

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