Bank regulator calls for dividends to remain on hold

The secretary-general of the Basel committee of regulators has said it is far too early for banks to take a “victory lap” over their response to coronavirus, arguing that shareholder payouts should remain on hold until the long-term impact of the pandemic is clear. 

In an interview with the Financial Times, Carolyn Rogers, who took up the post at the global regulatory body in August last year, indicated that investors would have to wait longer for dividends or share buybacks, despite pressure from bankers to be allowed to restart payouts.

When Covid-19 spread through Europe and the US in the spring, global regulators effectively banned dividends to ensure banks retained sufficient capital to continue lending to struggling companies.

Although Ms Rogers believes that banks’ robust capital buffers — despite the severity of the economic shock — demonstrate the effectiveness of post-crisis reforms, she stressed that there was more work to do.

“In a crisis, there is a premium on flexibility. Holding back on discretionary distribution of capital I think makes sense,” she said. “The capital does not disappear. If the hit isn’t as big as we think, they [banks] can still pay it out later.”

“We are all in this suspended reality. As government support programmes expire some businesses and households are going to fare better than others, there will be losses and the scale is unclear at this stage,” she added. “There is a long way to go.”

Ms Rogers’ comments come as regulators have faced a growing chorus of financial executives demanding they be allowed to restart dividends or repurchase stock, which would boost their ailing share prices flattened by the pandemic and ultra-low interest rates. 

While some countries such as Switzerland and Sweden have already indicated payouts could resume next year, the US Federal Reserve, European Central Bank and Bank of England have yet to make a decision about 2021

Ms Rogers expressed satisfaction with lenders’ support for businesses and households during the global pandemic this year. However, she said this was no more than they were expected to do under post-2008 regulations that were overseen globally by her organisation.

“Banks are not pulling back credit like they did [during the financial crisis] to save themselves at the expense of the broad economy,” she noted. “That’s a good thing, we can give them a gold star and a pat on the back, but we should also remember this is part of their job. Banks are supposed . . . to absorb and not amplify shocks and downturns to the economy.”

“Nor is this benevolence or charity. This is the business they are in and for most of them it makes them a lot of money,” she added. “It is important they are well capitalised and not over-leveraged.”

In the first half of the year, big western banks booked more than $139bn in reserves to cover potential loan losses — the most since the nadir of the financial crisis in 2009. But, after countries relaxed their rules over the summer and economic forecasts improved, a sharp drop off in provisions was seen in the third quarter and many lenders’ capital buffers grew far in excess of supervisory minimums. 

Another new set of post-2008 rules that have been tested during the coronavirus crisis are the new accounting standards for booking bad loans — known as IFRS 9 internationally and CECL in the US. They force banks to take greater provisions for bad loans much earlier than in the past. Ms Rogers admitted this change had been made significantly more difficult by the impact of coronavirus. 

“The problem with old rules was ‘too little too late’ . . . everyone agreed in the middle of the last crisis they didn’t work, so we needed better rules that encouraged banks to provision earlier,” she said. “We always knew the transition would be rocky, but it hit in the mother of all downturns.”

But she defended the rules as an “improvement over what we had . . . if I have to choose between ‘too little too late’ and ‘too much too early’, I will take the latter.”

Ms Rogers said her experience at the committee so far — where she has gone from conducting two meetings in her first six months, to 22 in the last six — had reaffirmed an early lesson about combating cyclicality.

“I always think of something my grandfather said to me when I told him I was going into banking: ‘People don’t trust bankers because they give out umbrellas when the sun is out, but they ask for the umbrellas back when the cloud rolls in’,” she recalled.

The Basel committee is worried that if banks attempt to protect their capital levels by constraining credit, it could lead to a “doom loop” of company failures, which in turn saddle lenders with more bad debt.

“You want them to step up prudence when the clouds blow in; you want them to quell discretionary distributions to curtail that cycle, but you are always pushing against that self-preservation when times get tough,” Ms Rogers said. “They want to keep up the share price, continue paying bonuses . . . it’s a delicate balance.”

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