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Ban on Dividends, Pay outs of 25% of the profits

The world with still recovering from the pandemic, which decimated the global economy over the last year, regulators all over the world have been particular about the Global Financial System’s functioning and its efficiency. Many measures are being implemented in order to ensure the effective working, the suspension of dividends from the banking sector is one such.

 The total dividends from all sectors globally fell by more than one-fifth to $382.2 billion in the second quarter of 2020, which is the biggest quarterly decline since the UK asset-management group began publishing its Global Dividend Index in 2009 says Janus Henderson .

 The BIS (Bank for International Settlements) wrote in May, “A further 14.3 percent drop to $330 billion followed in the third quarter, its lowest level since 2016. A significant portion of this decline can be directly attributed to regulation imposed on the banking sector. Many authorities have restricted capital distribution by banks in their jurisdictions. This reflects a broad accord that the capital conservation beyond the imagined one that of in Basel III is a necessary complement to the effective relaxation of capital requirements which is now being applied worldwide with the objective of preserving banks’ lending activity.” 

The regulators all over the world have taken steps to ensure that their banks maximize their lending capabilities to the real economy, not only via dividend restrictions but also through actions taken to limit share buybacks and flexible bonuses that are normally paid to the bank staff. These actions have a considerable impact on increasing the lending capacity, mainly through the effects of leveraging, and thus ultimately help in the broadcast of severely needed funding to households and businesses which are affected by the pandemic.

From a Hypothetical exercise conducted by the BIS, sheet ratios for 271 advanced-economy banks in 30 jurisdictions, found that a complete suspension of bank dividends in 2020 during the COVID-19 pandemic will be added, under a different pressure scenario, an additional $0.8–1.1 trillion of bank-lending capacity, equivalent to 1.1–1.6 percent of the total gross domestic product (GDP) of the sample.

Kristalina Georgieva, the International Monetary Fund’s (IMF’s) managing director, wrote in May, “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.” Credit and liquidity positions must remain as strong as possible in the meantime, which has meant that dividend suspensions have remained in place throughout much of the world. “The timing, reliability, and distribution impact of dividend disbursements need to be considered given the consequences for recipients, the impact on the economy also matters a great deal. Do dividend payments contribute more to economic resuscitation in a given economy through support for lending? Does taking bank dividend income away materially impact retail investors challenged in seeking income from the few high-quality investment alternatives available with ultra-low government bond yields?” the Global Risk Institute noted.

The Federal Reserve extended its restrictions through 2021’s first quarter, but it also eased the cap first placed on dividends in June 2020. According to an ECB statement. “Banks that intend to pay dividends or buy back shares need to be profitable and have robust capital trajectories.”

With BOE easing its dividend ban in December followed by completion of stress test which concluded that the banks were salient even in the extreme situations. Banks were asked to limit their dividend pay outs to the highest of 25 percent of the profit generated.  “Notwithstanding the impact of the Covid-19 pandemic on the global economy, banks remain well-capitalized and are expected to be able to continue to support the real economy through this period of disruption,” the BoE’s Prudential Regulation Authority (PRA) stated.

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Euro zone ministers expect inflation to slow in 2022

The acceleration of euro zone inflation, driven energy prices, is mostly temporary. Then the price growth will slow down again. The euro zone finance ministers agreed that, that too the next year as forecasted by the European Central Bank and the European Commission.

Paschal Donohoe, chaired the talks of the ministers in Luxembourg. In a news conference he said that there was also agreement that the inflation spike was not an argument against the transition to renewable sources of energy. This is under the EU’s ambitious plan of reducing CO2 emissions to zero by the year 2050.

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Under new rules, borrowing for investment sensible

British finance minister Rishi Sunak said that the government borrowing to fund investment was a sensible thing. This is to allow under new fiscal rules that he is likely to announce, unlike borrowing for day-to-day spending. He said that borrowing for capital investment that is going to drive up their growth is probably a sensible thing for them. And that too particularly in an environment of slightly lower interest rate. Sunak stated this in an event on the sidelines of the annual conference of Britain’s ruling Conservative Party. This event was organized by the Taxpayers’ Alliance advocacy group. Sunak stated in that event, that borrowing for more day-to-day spending is probably less something that you would want to have as part of your framework.

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IMF board to interview Georgieva-sources

The International Monetary Fund’s executive board is going to interview Managing Director Kristalina Georgieva. This is regarding that; its reviews claims that she pressured World Bank staff to alter data to favor China in her previous role. Board members were initially expected to meet with Georgieva. But spent their time working on other regular business matters.

The board members spent hours for questioning lawyers from the WilmerHale firm. This is about their World Bank investigation report which alleged that Georgieva, as the bank‘s CEO applied undue pressure on staff, to alter data in the flagship “Doing Business” report to benefit China. Then, an IMF spokesperson said that the IMF board remains committed to a thorough, objective, and timely review of the matter. Georgieva has strongly denied the accusations.

The upcoming interviews could prove pivotal in either increasing support for Georgieva. This is with many IMF shareholders are keen to wrap up the board’s deliberations on the matter. The fund’s most influential member governments, including the top shareholder the United States, have withheld public judgment. The World Bank tasked WilmerHale with investigating the “Doing Business” data irregularities identified in 2020. The law firm’s report contends Georgieva. The former World Bank President Jim Yong Kim’s office pressured staff to manipulate data so that the China’s global ranking in the “Doing Business 2018” study of investment climates rose to 78th from 85th.

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