MNI BRIEF: Bank Payouts Tighten Policy Stance - ECB Bulletin

Post-pandemic rises in bank payouts to equity investors could increase the tightening effect of monetary policy, a paper published as part of the ECB’s latest Economic Bulletin has argued, with estimates suggesting payouts on 2022 profits of around 1% higher than pre-pandemic standards were associated with a decrease of around 1% in loan volumes over the same period.

Banking supervisors recommended that euro area banks restricted payouts from March 2020 to September 2021. Since then, banks have distributed capital at a rapid pace, especially via share buybacks, with further increases in dividends also likely. Payout volumes vary substantially, with more profitable and more liquid banks tending to distribute more capital, the study’s authors found.

“While recent payouts have had a positive signalling effect on financial markets, higher payout commitments have been associated with lower bank credit supply and higher lending rates, therefore possibly contributing to the transmission of the monetary policy tightening impulse so far.”

However, while making the observations, the paper did highlight that any correlation could also capture factors related to the overall slowdown in loan growth in the context of monetary policy tightening.