IMF to Spanish Banks: Cut Dividends, Lend More


Capital rules, large banks, and lending continue to define the conversation for growth in struggling European countries, where high unemployment, weak governance, and the end of quantitative easing disincentivize firms from doling out cash.

As Spain deals with over 20 percent unemployment, banks there have not only stiffened lending requirements and hiked rates, but the need for higher capital requirements has further distanced their capital from the businesses and entrepreneurs who need it. The International Monetary Fund has been quite vocal about policy and economic direction across the globe lately, and Spain was no exception, where the IMF told banks to cut dividends instead of lending to deal with higher capital requirements.

In its third progress report on the sector, the IMF says, “Financial sector dynamics still contribute to recessionary pressures, with credit contraction accelerating, lending standards tightening, and lending rates to firms rising.” Indeed, this increase of rates and lowering of lending has been plaguing Europe for a while now, and in May, lending to non-financial institutions in Spain contracted by 9.1 percent.

However, encouraging banks to loan cannot be a substitute for the underlying conditions that make lending lucrative in the first place. Policy making throughout the bloc continues to be less than ideal, where government feuds in Greece have pushed bailout lenders to their limits, and socialists in Portugal are now calling for a renegotiation of their bailout funds.

With governmental and economic uncertainty brewing across the larger euro zone, the risks for banks remain high, especially when coupled with rules designed to prevent them from destroying the European economy.

These rules have also been a topic of conversation recently, as last week in the U.K., Barclays (NYSE:BCS) and former member of the Bank of England’s Financial Policy Committee Robert Jenkins disagreed that more stringent requirements on lending are actually a drag on growth. According to Jenkins, the financial industry lobbies the government into thinking this is true.

“I fear that the banks have bamboozled government into believing that society must choose between safety and growth, between safer banks and bank shareholder value, and between a safer financial framework and a competitive City of London,” Jenkins said.

However, Barclays hasn’t exactly agreed, and Chief Executive Officer Antony Jenkins said in June that they may have to cut lending should the U.K. government push for higher-than-expected capital ratios.

With a disagreement over whether or not capital ratios are a hindrance, the IMF feels that taking away shareholder value in the form of cash is the appropriate way to still meet these requirements while picking up lending. With China’s growth slowing, and the U.S. planning to cut off the easy money making its way over to Europe, it appears the headwinds are still great — and it will take more than IMF encouragement to convince banks that lending is appealing in Spain and beyond.

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