Don’t force Canadian banks to cut dividends

Banks are often in the political and regulatory crosshairs during times of economic stress, and COVID-19 is no different. Support for the payments system and credit markets can look like support for banks themselves. And supports for businesses are controversial. Few people want to prop up firms with no future and nobody wants government credit or transfer payments to fund executive bonuses or flow to shareholders through share buybacks or unsustainable dividends.

To start with the government supports, the Bank of Canada’s injections of liquidity into the financial system and unusual asset purchases to support credit markets generally were motivated by fear that the slump triggered by COVID-19 might trigger a financial crisis. But the slump did not originate with deposit-taking institutions. Banks were more the channels of assistance than the recipients of it.

Both OSFI’s moves and the federal government’s credit supports in partnership with private lenders will work better if the private lenders are making decisions on the basis of their own assessments of risks and rewards, including the risks and rewards of those decisions for their shareholders.

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