IMF urges bank regulators to extend curbs on dividends, buybacks

Regulators ought to lengthen limits on banks’ capital distributions to assist shield the monetary system in case the worldwide financial restoration proves sluggish, the International Monetary Fund stated, a suggestion that comes simply as some massive lenders are itching to renew repurchasing inventory and paying dividends.

Bank regulators must also act sooner to roll again non permanent reduction measures that undermine the reliability of economic statements, or tweak international capital guidelines, at the same time as different measures supporting the monetary system stay in place, the IMF stated in a brand new part of its semi-annual Global Financial Stability Report, launched Friday.

Executives from prime US and European banks have stated in latest weeks that they count on pandemic-era restrictions on capital distributions to be lifted quickly. They argue that they’ve constructed up sufficient capital to deal with any issues that may be brought on by a sluggish restoration.

Under an antagonistic financial situation thought of by the IMF, the world’s banks would fall $420 billion under regulatory capital necessities. That shortfall drops to $110 billion with the slew of non permanent measures regulators and governments have taken to protect the banking system, together with limits on capital distributions, the IMF stated.

“When you retain earnings as capital, they’re not lost,” Tobias Adrian, director of the IMF’s financial and capital markets division, stated in an interview. “Banks can pay them out to shareholders once the pandemic is over. So when policy makers are not sure when that might be, it’s better to be cautious and hold on to earnings.”

European regulators suspended financial institution dividends in March. In the US, the place extra capital is distributed by way of share repurchases, regulators halted solely buybacks whereas placing restrictions on dividend will increase and tying them to present revenue ranges. Those restrictions largely expire on the finish of the yr, however regulators might lengthen them. The US Federal Reserve is conducting this yr’s second stress test to see whether or not the nation’s largest banks can stand up to additional financial pressures in a lingering pandemic.

The IMF stated such stress checks are helpful and must be employed much more broadly as regulators attempt to decide the fragility of their monetary establishments amid the unprecedented challenges introduced by the pandemic. The fund, in the meantime, criticized non permanent reduction measures that undermine established capital and accounting guidelines. In addition to releasing capital buffers, regulators have suspended some guidelines on accounting for dangerous money owed and tweaked how capital ratios are calculated to ease the pandemic’s influence on financial institution stability sheets.

“There’s already plenty of flexibility built into accounting and capital rules,” Adrian stated. “Using those during the pandemic makes a lot of sense. That’s what buffers are designed for. But relaxing the rules themselves — for example, by changing the definitions of capital — can weaken the trust in the financial system.”