Adedapo Adesanya
By Adedapo Adesanya
The International Monetary Fund (IMF) has advised top commercial banks in the world to suspend dividend payment to their shareholders so as to retain earnings during the COVID-19 pandemic.
The Managing Director of IMF, Ms Kristalina Georgieva, made this call in a recent blog post titled Halt bank dividends and buybacks now, which was published on the lender’s website.
Ms 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 which later strengthened the resilience of the financial system.
The IMF Cheif wrote, “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 $250 billion in dividends and share buybacks in 2019.
“This year, they (banks) should retain earnings to build capital in the system,” Ms 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.
Ms Georgieva stressed that building stronger buffers by the banks would be in line with actions being undertaken to stabilise the economy.
“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,” she noted.
