Global banks’ use of payouts should be curbed to ensure medium-term capital retention, report says

Global banks’ use of payouts such as dividends, share buybacks and bonuses should be restricted so institutions keep large enough capital buffers over several years to support an economy jolted by the pandemic, Bank for International Settlements researchers said.

Banks’ credit losses have typically remained high for years after recessions end, and their profits are likely to lag for an extended period due to slower-than-usual loss recognition, the paper today said.

“Challenges for banks will just keep growing over the medium term,” the researchers said. “If past experience is any guide, buffers will be needed for quite some time.”

Governments also should provide public backstops to help allay banks’ worries about severe downside risks. This risk-sharing could take the form of guarantees for credit to viable firms, as well as government loan purchases or subsidies, the report said.

“Government guarantee schemes should require banks to keep 'skin in the game,' thus both protecting the solvency of the public sector and leveraging lenders’ ability to discriminate between good and bad credit,” it said.

The Basel-based Bank for International Settlements is the umbrella group of the world’s central banks.

— 'Capacity and willingness' —

Regulators in advanced economies have already eased large banks’ capital requirements to enable immediate lending during the sudden Covid-19 downturn.

But banks need to have the capacity and willingness to provide credit, both immediately and in the medium term, the paper said.

Banks with a price-to-book ratio of below one may try to boost their share price with stock buybacks. In addition, institutions may want to send a signal to the markets about their financial health by issuing dividend streams.

“However, payouts would divert financial resources away from the containment of the pandemic’s economic impact,” the researchers said.

Authorities can prohibit distributions or use moral suasion, they said.