Zurich, April 7

Eurozone banks continued to pay out generous dividends despite the region’s crisis, ultimately to the detriment of lending, the head of research at the Bank of International Settlements (BIS) said today.

Well-capitalised banks are able to lend at more advantageous conditions, said Hyun Song Shin presenting research at a conference in Frankfurt organised by European Central Bank (ECB).

However, eurozone banks have in recent years chosen to pay out considerable amounts to shareholders instead of using funds to boost capital and be in a better position to increase lending.

“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,” said Shin according to a transcript provided by the BIS.

He examined the retained profits and dividends paid by 90 eurozone banks between 2007 and 2014.

While their retained profits hit 261 billion euros during this period, they paid out 196 billion in dividends to shareholders.

“This means the retained earnings of these banks would have been 75 per cent higher in 2014, had the banks chosen to plough back the profits into their own funds rather than paying them out as dividends,” said Shin.

In certain countries such as Spain, France and Italy, the retained profits could in fact have been double their level at the end of 2014 if banks had not paid out dividends to shareholders.

French banks paid out 45 billion euros to shareholders during this period, while retaining only 26 billion euros.

“This should be of concern to central bankers,” said Shin, whose research found that the more of their own funds that banks had, the lower their costs to borrow funds and the faster they expanded lending, thus potentially generating more profits.

Sluggish lending by banks is viewed as being one of the key factors holding back eurozone’s economic recovery, and ECB has taken a variety of measures to encourage banks to issue more credit.

Shin noted a possible convergence of interests between shareholders and executives as to why eurozone banks have been reluctant to retain earnings.