System-wide measures on banks’ distributions – motivations and challenges

This article provides an overview of the actions aimed at reducing or suspending banks’ distributions on a system-wide basis. It finds that such measures imply a number of pros and cons which deserve further analysis. On the one hand, system-wide restrictions on distributions complement and enhance the effectiveness of other public support measures, including prudential relief measures, by ensuring that the “freed-up” capital is used for the purposes of supporting the real economy and absorbing losses. Furthermore, system-wide measures simultaneously address adverse incentives to deleverage by removing the stigma effects associated with institution-specific restrictions. On the other hand, the implementation of system-wide restrictions on distributions presents several concomitant drawbacks and challenges. In particular, investors may be reluctant to invest in banks which are subject to restrictions, which may hamper banks ’ability to raise capital in the longer term. Other challenges include interference with the smooth functioning of the internal market and the possibility of the measures becoming less effective over time when introduced via soft-law instruments. JEL Classification: G21, G28, G35