Italian banks should withhold dividends: central bank

Italy's central bank on Thursday urged commercial banks that posted losses last year to refrain from paying out shareholder dividends and to limit bonuses.

Recession and uncertainty about the prospects of a recovery "require an additional effort by banks, which must reinforce their defences given the deterioration of the quality of their assets," the Bank of Italy wrote in a letter sent to the heads of Italian financial institutions.

Those groups must increase their capacity for auto financing by adapting policies on operating costs, remuneration and dividends, and demonstrate "prudence" when evaluating the risks on outstanding loans, the central bank added.

Banks that close out their 2012 books with a loss or a core Tier 1 capital ratio that is below international standards should "avoid proceeding with dividend distributions," the letter noted. The core Tier 1 capital ratio is a measure of a bank's underlying strength.

It also suggested that troubled banks approve a "significant reduction in variable compensation" paid to bosses based on results, and limit directors' bonuses.