The Korea Herald


Financial authorities defend dividend cap on banks

By Park Han-na

Published : Feb. 8, 2021 - 16:43

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Financial Services Commission Chairman Eun Sung-soo speaks during a press briefing at the government complex in Seoul, Feb. 3. (Yonhap) Financial Services Commission Chairman Eun Sung-soo speaks during a press briefing at the government complex in Seoul, Feb. 3. (Yonhap)

The nation’s top financial regulators said Monday that their recommendation for lenders to limit dividend payouts was in line with global standards, rebutting criticism that it constituted excessive government intervention.

The Financial Services Commission and the Financial Supervisory Service have urged local banks to curb their dividends, saying the prolonged pandemic could hurt local banks’ financial soundness.

“The recommendation for a dividend reduction is a temporary measure to overcome the pandemic-induced crisis. Most foreign financial authorities are taking such action,” the regulators said in a press release.

On Jan. 28 the FSC advised banks and bank holding companies to bring their dividend payout ratios below 20 percent to maintain the minimum amount of capital needed to absorb the losses they could incur as a result of the coronavirus outbreak. Over the past five years, major banks here paid out an average of 24 percent of their profits in dividends.

The recommendation for the 20 percent cap remains valid until the end of June.

The FSC said 27 out of 30 major economies are carrying out measures to ensure that lenders maintain adequate capital to remain resilient, such as restrictions on dividend payments and share buybacks. It cited a report released in October by the Basel Committee on Banking Supervision, a global standard setter for the prudential regulation of banks.

The report shows the European Union and the United Kingdom advising banks to keep their dividends below 15 percent and 25 percent of their profit for 2019-2020.

“Given that major EU banks normally paid out 40 percent of yearly profits in dividends, they are taking more rigid steps when compared with Korea,” the commission said.

The FSC offered the rebuttal amid mounting complaints from investors bracing for cuts to their dividends although major lenders -- including KB Financial Group, Shinhan Financial Group and Hana Financial Group -- reported last week that their annual net profit figures hit record highs last year.

Dismissing concerns that the dividend restriction could hurt local banks’ credibility, the financial authority also cited a February report from Moody’s stating that the guidelines are “credit positive because they will restrict dividends for most banks in the Korean banking system, which will in turn support the banks’ capitalization.”

In response to criticism that the financial authorities took an unduly conservative approach when conducting stress tests on eight bank holding companies and six lenders last year, they said the testing was “reasonable and objective” and that they had applied the analysis method used by the International Monetary Fund.

In the scenario of an L-shaped recession, they examined if a bank has enough capital to withstand a negative economic shock if the country’s economy shrinks 5.8 percent in 2021. The worst annual growth logged by the country was a 5.1 percent contraction in 1998 in the aftermath of the Asian financial crisis.

“The principle is that stress test scenarios should be set in consideration of more pessimistic crisis situations than normal economic forecasts … the stress test should capture important and related risks appropriately and reflect serious crisis situations,” they said.

By Park Han-na (