Canada’s banking regulator cautions against lifting ban on banks raising dividends too soon

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Canada’s banking regulator is cautioning against lifting restrictions on banks’ dividend payments and share buybacks too soon as cases of the novel coronavirus spike again.

Since mid-March, the Office of the Superintendent of Financial Institutions has told the country’s banks not to raise dividend payments or to buy back shares. The temporary measure compels banks to preserve capital as a cushion against the possibility of further shocks to the economy or the financial system.

OSFI superintendent Jeremy Rudin, in a speech delivered virtually to risk managers at banks on Monday, said that capital will be its top concern if the economy takes a sharp turn for the worse. As a result, OSFI will only consider relaxing its controls on bank capital when there are “few if any” plausible scenarios that could cause that to happen, he said. “This means that there is no set date nor specific economic indicator that will trigger our decision.”

Mr. Rudin added that the regulator will err on the side of caution when considering payouts to investors. As long as the restrictions are in place, he suggested, banks can hang on to surplus capital and return it to investors after the pandemic is over. But he said that if financial institutions are allowed to use it too soon, and the economy falters again, that capital “cannot be recaptured when it is needed.”

“From our perspective, keeping the restrictions on a bit too long is not as serious a mistake as taking them off too soon,” he said.

In spite of promising results from clinical trials of vaccine candidates, as a regulator, “it is my job to remind you that it could get worse before it gets better,” Mr. Rudin told the bankers in his speech. “In severe but still plausible scenarios, it could get much worse.”

With the restrictions in place, banks have stockpiled billions of dollars in excess capital, and some analysts are predicting that a key capital ratio will improve again for many banks when they report fiscal fourth-quarter earnings next week.

In late August, when an analyst asked on a conference call whether Royal Bank of Canada had too much capital, chief executive officer Dave McKay responded: “No, I would say we’re appropriately reserved,” and added: “The capital is not burning a hole in our pocket.”

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