Euro zone banks should skip dividends to increase lending - BIS

Euro zone banks should be encouraged to keep more of their profits rather than pay dividends, to bolster their capital and finance new loans, the head of research of the Bank of International Settlements said on Thursday.

The euro zone has been battling low economic growth and sluggish lending for years, and banks have complained that rising capital requirements - the obligation to hold funds against loans and other exposures - are curbing their ability to extend credit.

Hyun Song Shin, head of research at BIS, the Swiss-based forum of major central banks, said it was in the public interest for banks to hold more of their earnings, because better-capitalised companies can fund themselves more cheaply and, therefore, are in a better position to lend.

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Euro zone banks paid 196 billion euros in dividends from 2007 to 2014, or roughly 43 percent of their profits, according to BIS data for 90 lenders incorporated in the currency bloc. That means they failed to make full use of their "most important source" of capital, Shin said, their retained earnings.

Spanish, French and Italian banks in that group paid out more than they retained, the data showed.

"Banks have paid out substantial cash dividends, even in those regions where bank lending may not be sufficient to support recovery of economic activity after the crisis," Shin told an audience of European Central Bank officials and economists in Frankfurt.

"This should be of concern to central bankers in pursuit of their monetary policy, as well as their financial stability mandates."

His comments were based on a BIS study, also published on Thursday, showing that a 1-percentage-point increase in the ratio between a bank's equity and its total assets is associated with a 4-basis-point reduction in its borrowing cost and a 0.6- percentage-point lending increase.

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Bank supervisors such as the ECB have the power to stop banks from paying dividends, bonuses and certain bond coupons if their capital falls below the regulatory minimum.

Investor fears about missing payments can affect banks' access to financial markets, however. That occurred earlier this year when the shares and convertible bonds of several lenders, including Germany's Deutsche Bank <DBKGn.DE>, sold off because of concern about their capital.

In his speech, Shin also said negative central bank interest rates discourage lending by squeezing the margin between the rate at which banks lend, which falls along with the policy rate, and the rate on deposits, which rarely goes below zero.

"Banks' lending rates will decline even if deposit rates do not, squeezing lending margins and dissuading banks from lending," he said.

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