"Financial Authorities Should Consider Easing Capital Dividend Restrictions on Bank Groups"

Korea Institute of Finance Report on "Current Status and Implications of Dividend Restrictions on Domestic and Foreign Banks Related to COVID-19"

[Asia Economy Reporter Sunmi Park] Financial authorities have expressed the opinion that it is necessary to consider easing capital dividend restrictions, taking into account the current capital adequacy of bank groups and the economic situation.

On the 13th, Kwon Heung-jin, a research fellow at the Korea Institute of Finance, explained in the report titled "Current Status and Implications of Domestic and International Bank Dividend Restrictions Related to COVID-19" that "Recently, major financial authorities, including the European Central Bank (ECB), have been easing capital dividend restrictions as the capital adequacy of their domestic banks improves and the real economy recovers."

The U.S. Federal Reserve Board (FRB) allowed limited share repurchases starting in 2021 based on the stress test results announced at the end of last year. In March, it announced a plan to allow individual banks to voluntarily conduct capital dividends if they meet capital requirements, including stress buffer capital, in the stress test results to be announced at the end of June. The ECB also permitted major banks to pay capital dividends within the limits of 15% or less of the accumulated net income for 2019?2020 and 0.2% or less of common equity tier 1 capital.

Research fellow Kwon stated, "Capital dividends are a natural right of shareholders and play a positive role by signaling the current status and future prospects of banks to the market and reducing agency costs between shareholders and management. Therefore, excessively prolonged restrictions on them are undesirable."

He further suggested, "Financial authorities need to comprehensively consider the results of re-conducted stress tests under current conditions, the appropriateness of past stress test scenarios, regulatory consistency with overseas financial authorities, and the competitiveness of domestic bank groups when reviewing the easing of capital dividend restrictions."

However, financial authorities emphasized that even if capital dividend restrictions are eased, they must continue efforts to maintain financial stability by continuously communicating with individual bank groups about their capital plans, monitoring the smooth implementation of these plans, and regularly conducting stress tests.

He advised, "Additionally, domestic financial groups should recognize that simply offering high dividends is insufficient to secure investor trust and enhance competitiveness. Even if capital dividend restrictions are eased, they should establish shareholder return policies that comprehensively consider short-term loss absorption capacity enhancement and medium- to long-term management strategy needs, and implement these policies transparently and consistently."