FSI published a brief note that describes how regulatory distribution constraints operate under Basel III and discusses how that standard has been applied in some jurisdictions. The note takes stock of recent supervisory actions aimed at capital conservation and discusses how they differ across a sample of 14 jurisdictions. The note highlights that most authorities have undertaken initiatives in relation to banks’ distribution policies but practices across jurisdictions diverge markedly regarding scope and stringency.
Many authorities have restricted capital distribution by banks in their jurisdictions. However, not all important financial centers have issued concrete public guidance regarding this. Moreover, among those that have taken public action, the scope, severity, and duration of the measures differ, making the conservation measures somewhat incomparable across countries. These differing dimensions include the following aspects:
- Measures differ in their scope. Some jurisdictions have undertaken initiatives that capture all types of distribution, including dividends, share buybacks, and bonuses. Others apply different regimes to dividends and share buybacks. Most jurisdictions have not restricted bonuses.
- The degree to which authorities restrict distributions differs. In some jurisdictions no distributions at all will be paid in 2020, while in others authorities have issued high-level recommendations not to increase distributions.
- Authorities’ measures differ in terms of the period of time for which they will apply. Some authorities have specified a fixed period, even if only tentatively, while others have taken more open-ended measures that apply until they are alleviated or removed. Moreover, the fixed periods of application differ in length, with the minimum extending until mid-2020. UK is the only jurisdiction in which restrictions apply retroactively by cancelling outstanding 2019 dividends, albeit with regard to only the seven largest systemically important UK banks.
- Given the extreme market sensitivity, some authorities may have preferred to make specific and targeted recommendations to the institutions as part of their regular supervisory dialog rather than to publicly issue general restrictions.
The note emphasizes that regulatory actions in the current circumstances need to focus on preserving banks’ lending activity without jeopardizing their solvency. This means that flexibility in capital requirements, including through the use of regulatory buffers, and capital conservation should go hand in hand. Basel III provides for automatic distribution constraints when capital falls below specific thresholds. In the current context, this may disincentivize firms from following authorities’ recommendations to use capital buffers. The note concludes that blanket distribution restrictions imposed through supervisory action may help address these disincentives to the extent that they are not linked to firms’ individual capital positions and thus remove any possible stigma effect.
Related Link: Brief on Dividend Distribution
Keywords: International, Banking, COVID-19, Basel III, Dividend Distribution, Regulatory Capital, Capital Buffers, FSI
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