By mrjo @

President Reagan had it right when he said over three decades ago that the nine most terrifying words in the English language are, “I’m from the government, and I’m here to help.” What has the world learned since? Not much it would appear. Government intervention into the private market, in many cases, causes more harm than good. The ban on bank dividends in Europe may be the latest example. The FT has more:

Back when the British government imposed colonial rule over India, its leaders wanted to cut down on the population of deadly cobras in Delhi. So the government offered a bounty for every cobra carcass. Delhi residents responded rationally — they began breeding cobras to claim the rewards.

When the government scrapped the reward scheme in response, the breeders set their now worthless reptiles free, driving up the feral population.

This cautionary tale comes to mind when considering the decision earlier this year by European banking regulators to force banks to cancel dividend payments. It is also producing an effect that is the exact opposite of what was intended, and despite the news last week that Swedish regulators may allow their banks to resume dividend payments next year, that may be too late to correct the unintended damage.

On the face of it, cancelling dividends made sense. In March, almost 70 European banks were expected to pay around €60bn in dividends to their shareholders during 2020. Halting those payments would help preserve their capital, leaving them better equipped to deal with the feared economic damage from Covid-19.

Banks across Europe complied, led by a new generation of chief executives keen to demonstrate that in the pandemic crisis — unlike the financial crisis of 2008 — they would be part of the solution, not the problem.

Investors were not happy. Since late March, the combined market capitalisation of the 66 largest banks in Europe has fallen by €250bn, or almost 25 per cent. That’s largely because dividends are one of the key reasons to buy bank shares. Unsurprisingly, banks are itching to resume payments; Santander’s chief executive José Antonio Alvarez said recently, “we are making our case”.

These unintended consequences make it a version of the cobra effect. Banks need capital to support lending to customers. They can generate it internally from making profits or externally by raising more money from shareholders. While cancelling dividends kept €60bn of extra capital in these banks, the resulting plunge in their share prices has badly damaged the ability of all lenders to raise fresh capital. That means banks’ overall access to new capital is worse now than it was before the regulators intervened.

Read more here.