RBNZ Retains Certain Dividend Restrictions Amid Ongoing Challenges
RBNZ is easing the dividend restrictions placed on retail banks at the height of the COVID-19 pandemic. The changes will allow banks to pay up to a maximum of 50% of their earnings as dividends to their shareholders. The 50% dividend restriction will remain in place until July 01, 2022, at which point RBNZ intends to normalize the dividend setting by removing the restrictions entirely (subject to no significant worsening in economic conditions). This is also the date at which higher capital requirements begin to apply to systematically significant banks, as set out in the RBNZ Capital Review. RBNZ has written to the registered trading banks to advise them of the decision and outlined the expectations that banks will be prudent in determining the appropriate size of dividends paid to their shareholders.
The RBNZ restrictions on repaying holders of Additional Tier 1 and Tier 2 capital instruments have also been lifted. Dividends may not exceed 50% of net profit after tax reported in the bank’s most recently completed financial year. The restrictions do not prevent a bank from paying an interim dividend (for example, at the half year). In such cases, it is the total dividend paid in the year that is limited by the restriction. Mr. Geoff Bascand, Deputy Governor and General Manager Financial Stability of RBNZ, pointed out that it is appropriate to retain partial restrictions on the dividends banks can pay amid ongoing uncertainties, even though economic activity in the country has picked up over recent months. A restriction preventing banks from paying any dividends was put in place in April 2020, and extended in November 2020, to support financial stability and the provision of credit in the economy due to the impact of the COVID-19 pandemic on the New Zealand economy. The restrictions have been successful in this purpose.
RBNZ also notes that bank decisions should consider the requirement to meet higher capital requirements resulting from the Capital Review of RBNZ. The higher capital requirements set out in the Capital Review begin to apply from July 01, 2022. Mr. Bascand also noted that RBNZ has delayed the implementation timetable of the Capital Review twice over the course of last year to allow banks the regulatory relief needed to support their customers. However, "building strong capital buffers needs to be prioritized.”
Related Links
- Letter to Banks (PDF)
- News Release on Restrictions, November 2020
- Capital Review Implementation Timeline, November 2020 (PDF)
- Capital Review Guide, 2019 (PDF)
Keywords: Asia Pacific, New Zealand, Banking, Financial Stability, COVID-19, Regulatory Capital, Dividend Distribution, Basel, Implementation Timeline, RBNZ
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