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Banks should be encouraged to retain earnings, BIS research head says

Hyun Song Shin, economic adviser and head of research at theBank for International Settlements, said at an April 7 panel discussion inFrankfurt that central banks should consider introducing policies thatencourage banks to retain earnings, instead of paying dividends, to boostcapital and improve lending capability.

"Banks have paid out substantial cash dividends, evenin those regions where bank lending may not be sufficient to support recovery ofeconomic activity after the crisis. This should be of concern to centralbankers in pursuit of their monetary policy, as well as their financialstability mandates," he said.

Shin cited the results of a BIS analysis that showed a1-percentage-point increase in banks' equity-to-total-assets ratio isassociated with a 4-basis-point reduction in the cost of borrowed funds and a0.6-percentage-point uptick in the subsequent growth in lending.