The International Monetary Fund (IMF) has advised banks to
suspend dividend repayment to shareholders during the pandemic.
In an article published on its website, Kristalina
Georgieva, IMF managing director, said the decision is necessary to help banks
reinforce their capital buffers against the shocks caused by the pandemic.
“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,” she said.
“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.”
Although Georgieva said dividend suspension could have
unpleasant implications for shareholders, she urged them to view it as a
situation where “shareholders who sacrifice now will prosper when growth
restarts”.
According to the MD, IMF staff calculations show 30 global
systemically important banks distributed about $250bn in dividends and share
buybacks in 2019.
“Of course, this has unpleasant implications for shareholders,
including retail and small institutional investors, for whom bank dividends may
be an important source of regular income,” she said.
“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 public sector is doing what it can to help prevent
another banking crisis from happening again. Shareholders have both an interest
and an obligation to do the same.”
Banks were also advised to make the decision collectively as
investors could penalise banks that take the decision on their own.
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