French President Nicolas Sarkozy asked banks to divert “almost all of their dividends into capital” to shore up their balance sheets, he told French television today (via Bloomberg).He also asked banks to make their bonus practices “normal.”
This follows on the heels of yesterday’s EU summit, from which leaders mapped out a timeline for bank recapitalization and announced that private sector bondholders would take a 50% haircuts on Greek bonds. Banks will be required to maintain a 9% core capital ratio as part of the new agreement.
cancelling dividends is a wise move for four reasons:
– Failure to pay dividends often signals that a bank is having trouble, so here Sarkozy seems to be giving banks across the board free rein to cancel dividend payments to shore up their capital requirements.
– Cancellation of dividends could prevent banks from seeking capital from the French government — a win-win for both the banks (as a signal) and the taxpayer. Even if the French government did have to shore up some of its banks, cancelling dividend payments will save taxpayers money.
– French banks will need all the help they can get — and perhaps need assistance from the French government — in order to meet the new 9% capital requirements.
– If they all do so in conjunction, this will make it difficult for speculators to target one bank or another.
However, Sarkozy’s announcement is also problematic because it suggests that at least one big French bank might be having funding problems in the first place.
Nonetheless, he told French television, “We can be fully confident in the solidity of our banks.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.