The 2022 Nobel Prize in Economics and specialist in bank panics Douglas Diamond advocated this Friday for a reduction, or even the abolition, of dividends paid within banks to create a margin of maneuver that guarantees the soundness of the financial system.
“We say: ‘a crisis should not go to waste’ and this is probably the right time to think about raising capital” for banks, the US economist told reporters during asset manager Amundi’s annual Forum, which celebrates held in Paris at the Carrousel du Louvre.
After a twenty-minute speech in front of the main auditorium, the professor from the influential Chicago school wanted to be reassuring about the current financial situation.
“I don’t think there will be another financial crisis this year. The vulnerabilities have been well managed,” he said.
But the crisis has opened a window of opportunity to push the solutions promoted by this specialist in “bank runs”, the brutal and massive withdrawal of deposits from savers from a bank, to the point that it can no longer respond to them. thus going bankrupt. .
In March 2023, three US banks, including Silicone Valley Bank, one of the fifteen largest in the US, closed almost simultaneously, sending a wave of panic across financial markets, but also among policy makers.
Equity
First of all, Douglas Diamond deplores the payment of dividends. “Now is probably a good time to think about raising capital in banks. Keeping dividends low, or lowering them, is a good measure of long-term stability because they would have less need to raise capital.”
The call for new capital is always dangerous for a bank because “investors tell themselves that it must be in crisis,” he argues.
“The upside of regulators calling for dividend cuts is that while investors may think the whole system is in trouble, at least it’s not one particular bank. Even if that’s a bit unfair, at least we unite everyone.” “.
For him, “only very, very capitalized banks” should be able to redistribute money to their shareholders.
The economist also advocates that the bonuses paid be in the form of financial securities of the company and recoverable only after several years, so that employees do not feel inclined to take too much risk in their investments.
rate hikes
The 2022 Nobel Prize winner, received together with Philip Dybvig, co-author of his economic model on bank panics, and the former president of the US Central Bank Ben Bernanke, is instead quite friendly with social networks, sometimes pointed out for having accelerated the movement. .flight of savers.
“If everything went fast at the Silicon Valley bank, it’s not because people were connected, but because the bank was short of money,” he said.
On the contrary, “these social networks can be used to stop rumors, unwarranted fears. Social networks can bring stability by combating false information. But when the rumor is true and the bank is effectively insolvent, these types of social networks cannot help.”
The economist is critical of the role of central banks at the start of the crisis, in particular with the failure to supervise banking establishments in a context of sharp rise in rates, potentially dangerous for the financial system.
“Central bankers like to say that price stability and financial stability are two different things and should be treated separately. This is a big mistake, because they are connected.”
“Committing to low interest rates for a long time pushes banks to borrow in the short term and therefore raising rates unexpectedly poses problems,” he explains.
Source: BFM TV
