• French, Italian, Spanish payouts exceed retained earnings
  • BIS data shows higher capital ratios boost credit growth

Euro-area banks weakened their capital bases by paying substantial dividends throughout the crisis years, especially in France, Spain and Italy, where payouts since 2007 have exceeded the level of retained earnings, according to the Bank for International Settlements.

Those funds could have helped boost lending to the real economy instead, according to the text of a speech in Frankfurt Thursday by Hyun Song Shin, head of research at the Basel-based “central bank for central banks.” Higher capital ratios reduce banks’ funding costs and increase the money they lend, a study presented by Shin in Frankfurt argues.

“Banks have paid out substantial cash dividends, even in those regions where bank lending may not be sufficient to support the recovery,” Shin said in the speech. “This should be of concern to central bankers in pursuit of their monetary policy, as well as their financial stability mandates.”

The remarks come as bankers and some policy makers say regulators should softpedal the strict capital requirements and prudential rules agreed after the financial crisis and instead help boost the sluggish European economy. The Basel Committee on Banking Supervision, which is hosted by the BIS in Basel, warned this week against “myopic” calls for easing regulatory standards.

The 90 euro area banks in the sample in Shin’s study, which include Deutsche Bank AG, BNP Paribas SA, UniCredit SpA and Banco Santander SA, paid cumulative dividends of 196 billion euros ($223 billion) in the period from 2007 to 2014, Shin said. Retained earnings, which is the sum of all profits a bank has made that haven’t been paid out, stood at 261 billion euros in 2014, almost unchanged in those seven years.

“This means that the retained earnings of these banks would have been 75 percent higher in 2014, had the banks chosen to plow back the profits into their own funds rather than paying them out as dividends,” Shin said. “For the sub-sample of banks from Spain, France and Italy, retained earnings would have been more than double what it was at the end of 2014.”

The analysis also shows that a 1 percentage-point increase in the ratio of equity to total assets of a bank is associated with a reduction in the lender’s funding costs by 4 basis points. It also translates into greater lending, leading to a 0.6 percentage point up-tick in credit growth, Shin said.

“To the extent that under-capitalized banks perpetuate a weak economy and thereby keep bank stock prices under pressure, it may even be the case that paying out large dividends also fails to promote the collective interests of the bank’s shareholders, let alone the wider public interest,” he said.

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