Banks' dividends in Covid-19 times

Highlights

• Regulatory actions in the current circumstances need to focus on preserving banks' lending activity without jeopardising their solvency. This means that flexibility in capital requirements, including through the use of regulatory buffers, and capital conservation should go hand in hand.
• Basel III provides for automatic distribution constraints when capital falls below specific thresholds. In the current context, this may disincentivise firms from following authorities' recommendations to use capital buffers.
• Blanket distribution restrictions imposed through supervisory action may help address these disincentives to the extent that they are not linked to firms' individual capital positions and thus remove any possible stigma effect.
• Most authorities have undertaken initiatives in relation to banks' distribution policies in the Covid-19 pandemic environment. However, practices across jurisdictions diverge markedly as regards scope and stringency.