(Bloomberg Opinion) -- When the pandemic hit, regulators and policymakers around the world raced to cushion the blow to the economy and keep banks functioning. From guaranteeing loans to rolling out payment holidays to easing capital demands, the aim was to ensure borrowers would have some breathing space and that credit wouldn’t seize up. It worked.

Buoyed by their successes, regulators need to embrace yet bolder action: letting at least the fittest lenders resume investor payouts.

The European Central Bank and the Bank of England, which are due to give fresh guidance this month, are reportedly considering a partial return to dividends. Failing to do so would undermine confidence in the supervisors as much as in the firms they oversee. Despite the uncertainty that still lingers on the strength of the economic rebound, tarring all lenders with the same brush only holds back the stronger ones. The longer that continues, the greater the damage will be on the entire sector. 

We’ve come a long way since March, when regulators in effect imposed a blanket ban on payouts. At the time, it was a controversial but necessary move. Banks are required to hold certain amounts of capital to ensure they can remain solvent through a crisis, though they are free to allocate their excess reserves as they see fit. But preserving financial stability during the pandemic was what mattered most. What’s needed now is for the fittest lenders to be able to pull away from the pack. 

To be fair, some top regulators worry that little has changed since the onset of the crisis. Many companies and households remain on government-backed life support. And the sheer magnitude of assistance is hard to ignore: As of June, about 7.5% of total loans — or $1 trillion worth — was subject to payment holidays in Europe, with the figure at some firms peaking at as much as half of their total loans.

Just this week the European Banking Authority gave borrowers yet more time to seek payment delays amid the fresh autumn lockdowns, while the International Monetary Fund warned that the new restrictions on people’s activities are dragging the euro area back into a slump. Dividends and buybacks should stay on hold until the recovery is “well underway,” the IMF said. There is still little visibility into which customers will be able to honor their debt.

What’s more, though banks went into the crisis with large amounts of capital, and many have even improved their buffers in recent months, this sign of strength does require a certain degree of faith. The top European lenders have set aside funds for potential Covid-related losses that total less than 1% of their loans — which could be a tiny amount if economies do not recover to pre-pandemic levels for years to come. It’s worth noting, too, that banks’ capital positions also improved because lenders postponed dividends and granted temporary regulatory relief.

So, the doomsayers say, it’s anyone’s guess whether banks will be able to withstand the hit of the pandemic once it crystallizes.

The reality, however, is that supervisors have a pretty good sense of which institutions can weather the shock better than others and which lenders can continue to generate capital post-pandemic. Of course, it would have been nice to have the stress tests planned for next summer done sooner to get more transparency. But prolonging an industry-wide restriction on investor payouts only raises concerns that the entire sector can’t generate profits, penalizing healthier banks and making it harder for them to attract investors. And investing in technology has become even more pressing amid the rapid shift to digital.

Some officials are indeed leaning toward a return to payouts for some banks. They should be listened to. Many banks were struggling well before Covid-19 struck. By allowing those that appear sound to repay shareholders, they would let a much needed shakeout in the crowded banking industry run its course. That would be a sign of confidence that investors would be hard pressed to ignore.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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