The International Monetary Fund has advised commercial banks to retain their earnings by suspending payment of shareholders’ dividends during the COVID-19 pandemic.
The IMF Managing Director, Kristalina Georgieva, made the call in an opinion article entitled ‘Halt bank dividends and buybacks now’.
Georgieva said retaining earnings through suspension of dividend payments would provide banks with enough capital to serve as a buffer against the adverse effects of the pandemic.
She pointed out that after the 2008 global financial crisis, regulators required banks to increase their prudential buffers of high-quality capital and liquidity.
The development, according to her, strengthened the resilience of the financial system.
The IMF boss said, “As we brace ourselves for a deep recession in 2020, and only partial recovery in 2021, this resilience will 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.”
Pointing out that the resources available to banks were substantial, she disclosed that the IMF staff calculated that ‘the 30 global systemically important’ banks distributed about $250bn in dividends and share buybacks in 2019.
“This year, they (banks) should retain earnings to build capital in the system,” Georgieva said.
The IMF chief admitted that suspension of dividend payments would have unpleasant implications for shareholders, including retail and small institutional investors “for whom bank dividends may be an important source of regular income”.
“Nonetheless, in the face of the abrupt economic contraction, there is a strong case for further strengthening banks’ capital base,” she added.
Georgieva stressed that building stronger buffers by the banks would be in line with actions being undertaken to stabilise the economy.
Noting that the interests of shareholders were aligned with those of bank supervisors and customers, the IMF boss said all stakeholders would ultimately benefit if banks preserved capital instead of paying out dividends during the pandemic.