MNI BRIEF: Covid Dividend Ban Linked To SME Credit Rise - ECB

Withholding bank dividends boosted lending during the Covid-19 pandemic, with vulnerable businesses benefiting most from the subsequent re-allocation of capital at the same time as banks’ capacity to absorb losses was strengthened, the latest ECB research bulletin shows.

The central bank asked institutions not to pay out dividends in March 2020, hoping to drive up credit to households and firms. Banks that complied lent 18.1% more on average in the first quarter of the pandemic (declining to 2.2%) without an increase in risk-taking, with “economically significant, but short-lived” effects for SMEs in particular.

“Implementing a dividend restriction policy can effectively redirect resources from inefficiently high shareholders’ consumption to credit supply,” the study’s authors conclude, but such measures - which likely have a higher multiplier than consumption - must be temporary and accompanied by clear forward guidance.