Suspend payment of dividends, IMF tells banks

Managing director of the International Monetary Fund (IMF), Kristalina Georgieva, has advised banks to withhold payment of dividends this year in order to increase their prudential buffers of high-quality capital and liquidity.

Tribune Online reports that Georgieva, who said this in an opinion article published by the Financial Times, noted that illiquidity resulting from dividend payout could put a strain on banks and precipitate a crisis for them.

According to her as the world braces up for a deep recession in 2020 and only partial recovery in 2021, the resilience of banks would be tested.

“Having in place strong capital and liquidity positions to support fresh credit will be essential. One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations. These are not insignificant. IMF staff calculate that the 30 global systemically important banks distributed about $250bn in dividends and share buybacks last year. This year they should retain earnings to build capital in the system.”

Drawing from the experience of the 2008-2009 financial meltdown, the IMF chief said, “After the 2008 financial crisis, global regulators required banks to increase their prudential buffers of high-quality capital and liquidity. That significantly strengthened the resilience of the financial system. Many observers now cite those buffers as a bulwark against the adverse effects of the COVID-19 pandemic.”

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While acknowledging that not paying dividends could have unpleasant implications for shareholders, including retail and small institutional investors, she noted that considering the looming abrupt economic contraction, the step would be necessary to further strengthen banks’ capital base.

She said, “Building stronger buffers is aligned with the array of actions undertaken to stabilise the economy. Governments are deploying fiscal measures in trillions of dollars, including financing that provides a backstop for borrowers who are tapping bank loans. Central banks have innovated and provided extraordinary liquidity support to a wide range of markets. Bank supervisors have exercised flexibility to the fullest possible extent by encouraging banks to restructure loan repayments, easing regulatory requirements, and allowing banks to draw down their buffers temporarily.

“The interests of bank shareholders are aligned with those of bank supervisors and customers. All stakeholders will ultimately benefit if banks preserve capital instead of paying out to shareholders during the pandemic. Protecting the banking sector’s strength now means that, once the recovery picks up, shareholders can expect large payouts — indeed the more profits retained now, the larger the eventual payout.”

The IMF managing director said the decision not to pay dividends must be collective and not something a bank should solitarily take.

She said, “Banks that take action on their own could be penalised by investors who fail to understand the need to restrict payouts. All banks should be covered — whether state-owned or private, whether commercial or investment. But no bank can do it alone, and if banks’ collective will is not there, then supervisors should take the decision for them.”