Regulators around the world have been very keen in keeping the global financial systems functioning as effectively as possible, with the world being in very disturbed conditions due to the pandemic which has decimated the Global economy over the past few months. Many measures were implemented to ensure the ongoing system doesn’t hit the bottom and one such measure is the suspension of the dividends from the banking sector. 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 and a further 14.3 percent drop to $330 billion followed in the third quarter, its lowest level since 2016. Majority of this decline can be directly due to the regulation imposed on the banking sector.
“Many authorities have restricted capital distribution by banks in their jurisdictions. This reflects a broad consensus that capital conservation beyond that envisioned in Basel III is an essential complement to the effective relaxation of capital requirements which is now being useful worldwide with the objective of preserving banks’ lending activity,” said the BIS (Bank for International Settlements) wrote in May. The banks have taken measures to ensure the lending abilities are maximized to the real economy, not via dividend limitations but also through actions taken to limit share buybacks and open bonuses that are normally paid to the bank staff. These actions have extensive impact on enhancing the lending capacity, especially through the effects of leveraging and ultimately helping in the transmission of badly needed funding to households and business affected by the Covid crisis. The BIS conducted a theoretical exercise with fixed balance-sheet ratios for 271 advanced-economy banks in 30 jurisdictions, finding that a broad suspension of bank dividends in 2020 during the COVID-19 pandemic would have added, under a different stress scenario, an additional $0.8–1.1 trillion of bank lending capacity, corresponding to 1.1–1.6 percent of the total gross domestic product (GDP) of the sample.
“One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations, these are not insignificant. IMF staff calculated 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,” Kristalina Georgieva, the International Monetary Fund’s (IMF’s) managing director, wrote in May. The US Federal Reserve System (the Fed) declared in June that it would restrict bank pay-outs after piloting stress tests that determined lenders would face substantial capital losses in a pandemic scenario, keeping concerns in mind. US bank decided to prevent banks from paying higher dividends than they did in the second quarter. The European Central Bank (ECB) took equally cautionary measures early on during the pandemic, initially urging banks to delay paying dividends until the final quarter of 2020 to free up €30 billion of capital that could be focused towards supporting offering to households and businesses, then subsequently in July extending this delay to January 2021. The Bank of England (BoE) also ordered UK banks in March to scrap almost £8 billion worth of dividend pay-outs that were due for the 2019 financial year, thanks to the arrival of the pandemic. Further measures like dividend policies in each country have, by and large, been applied across the board rather than regulators picking on individual banks. 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 Bank of England (BoE) also eased its dividend ban in December following the completion of two stress tests that found that the UK banking sector was sufficiently resilient in even extreme economic scenarios.
