The Managing Director of the International Monetary Fund (IMF), Ms. Kristalina Georgieva, has called for an immediate halt to dividend payments and share buybacks by banks.
In an Op-Ed published in the London Financial Times, the IMF boss argued that given the looming deep recession in 2020, occasioned by the coronavirus (Covid-19) pandemic as well as the projected partial recovery in 2021, it was imperative that measures should be taken to further strengthen banks’ capital base.
She said: “After the 2008 financial crisis, global regulators required banks to increase their prudential buffers of high-quality capital and liquidity. That significantly strengthened the resilience of the financial system. Many observers now cite those buffers as a bulwark against the adverse effects of Covid-19.
“But 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.
“These are not insignificant. IMF staff calculate that the 30 global systemically important banks distributed about $250 billion in dividends and share buybacks last year. This year they should retain earnings to build capital in the system,” she added.
The IMF MD stressed that while shareholders, including retail and small institutional investors, for whom bank dividends may be an important source of regular income, would clearly not welcome her proposal, “there is a strong case for further strengthening banks’ capital base,” given the sudden contraction of economies and the measures rolled out by various authorities to tackle the crisis.