The Basel Regulatory Committee’s secretary general said it was far too early for banks to have a “winning lap” over their response to coronavirus, arguing that shareholder payouts should be put on hold until the pandemic’s long-term effects are clear.
In an interview with the Financial Times, Carolyn Rogers, who joined the global regulator in August last year, pointed out that despite pressure from bankers to resume payouts, investors would have to wait longer for dividends or share buybacks.
When Covid-19 spread to Europe and the US in the spring, global regulators effectively banned dividends to ensure banks retain enough capital to continue lending to ailing businesses.
Although Ms. Rogers believes that banks’ robust capital buffers – despite the severity of the economic shock – demonstrate the effectiveness of post-crisis reforms, she stressed that more work needs to be done.
“In a crisis there is a bonus for flexibility. I think it makes sense to withhold the discretionary distribution of capital, ”she said. “The capital is not disappearing. If the hit isn’t as big as we think, then [banks] can pay it off later. “
“We are all in this floating reality. As government support programs expire, some businesses and households will do better than others, there will be losses and the extent of this is unclear at this point, ”she added. “It is a long way.”
Ms. Rogers’ comments come from the fact that regulators were exposed to a growing chorus of financial managers demanding that they resume dividends or buy back shares, which would boost their battered stock prices, which are flattened by the pandemic and extremely low interest rates.
While some countries like Switzerland and Sweden have already announced that payouts could resume next year, the US Federal Reserve, European Central Bank and Bank of England still have a decision to make in 2021.
Ms. Rogers said she was pleased with the support provided by lenders to businesses and households during the global pandemic this year. However, she said this was no more than expected under the 2008 regulations monitored by her organization worldwide.
“Banks don’t withdraw credit like they do [during the financial crisis] to save herself at the expense of the wider economy, ”she observed. “That’s a good thing, we can give them a gold star and a pat on the back, but we should also remember that this is part of their job. Banks should. . . To absorb shocks and downturns for the economy, not to intensify them. “
“Nor is this benevolence or charity. This is the business they are in and for most of them it makes them big bucks, ”she added. “It is important that they are well capitalized and not leveraged.”
In the first half of the year, major Western banks booked reserves of more than $ 139 billion to cover potential credit losses – most since the bottom of the financial crisis in 2009. After countries relaxed their rules in the summer and improved economic forecasts, Im There was a sharp decline in provisions in the third quarter, and many lenders’ capital buffers grew well beyond regulatory minimum requirements.
Another new set of rules after 2008 that was tested during the coronavirus crisis is the new accounting standards for booking non-performing loans – known as IFRS 9 internationally and CECL in the US. They are forcing banks to set up larger provisions for bad loans much sooner than in the past. Ms. Rogers admitted that the effects of the coronavirus made this change significantly more difficult.
“The problem with the old rules was ‘too little too late’. . . Everyone agreed in the middle of the last crisis that they weren’t working. So we needed better rules that would encourage banks to take precautions earlier, ”she said. “We always knew the transition would be rocky, but it hit the mother of all downturns.”
But she defended the rules as “an improvement over what we had. . . If I have to choose between “too little too late” and “too much too early”, I will take the latter. “
Ms. Rogers said her previous experience on the committee, moving from two meetings in the first six months to 22 in the last six months, confirmed an early lesson on tackling cyclicality.
“I always think of something my grandfather said to me when I told him I was going into banking: ‘People don’t trust bankers because they give out umbrellas when the sun is shining, but they ask about the umbrellas, when the cloud rolls in ‘”she recalled.
The Basel Committee fears that banks trying to protect their capital through credit restrictions could lead to a “doom loop” of corporate failure, which in turn saddles lenders with more bad debts.
“They want them to be careful when the clouds are blowing in. You want them to suppress discretionary distributions to shorten that cycle, but you always push against that self-preservation when times get tough, “Ms. Rogers said. “You want to keep the share price and keep paying bonuses. . . It’s a delicate balance. “