Managing Director of the International Monetary Fund, Ms. Kristalina Georgieva, has advised banks to suspend giving out dividends and buybacks to reinforce their buffers by retaining earnings from operations.
According to her, preservation of capital will save the banks from seeking bailout and other forms of help to cushion the effect of the coronavirus disease on the economy.
In an opinion piece, the IMF boss cited the aftermath of the 2008 global economic crisis, referencing regulators’ demands on commercial banks to increase their “prudential buffers” to boost liquidity and solidify the capital base.
“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 bulwark against the adverse effect of the COVID-19 pandemic.
“But as we brace ourselves for a deep recession in 2020, and only partial recovery in 2021, this resilience will be tested. Having in place a strong capital and liquidity positions to support fresh credits will be essential.
“One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations. These are not insignificant,” Georgieva opined.
Admitting that the step would affect shareholders, especially those who consider bank dividends as a source of regular income, she noted that shareholders’ interests are aligned with those of bank handlers.
The IMF boss submitted that if the banks retained earnings, their shareholders would benefit when the tide turns northward after the crisis.
She noted, “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 large the eventual payout.
“The need to preserve capital is already being recognised and needs to be so, more widely. In some countries, banks have voluntarily decided to collectively suspend shareholder payouts and buybacks. In others, supervisors have had to push.”
She further called for collective decisions involving banks and their investors to understand the need to restrict payouts in order not to be penalised.
