Restrictions On Bank Dividend Payments Lifted

BoE removes ban on bank dividends to shareholders as economy starts to recover.

July 16, 2021
Restrictions On Bank Dividend Payments Lifted
Ian Lewis

Written By

Ian Lewis

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The Bank of England has removed restrictions on banks that banned them from making dividend payments to shareholders or allowing share buybacks, after declaring that the sector was in a robust position.

The central bank said that the banking sector is in a good place to resist any further COVID-19 issues and that lower-than-expected loan losses, and recent stress tests on the capital of banks, has meant that banks can begin to make payments whilst still being in a position to support the UK economy as it continues to recover.

The dividend suspension

Banks were first restricted on dividend payments last April as the pandemic began to gain a foothold in Europe and the UK entered lockdown.

The Bank of England enforced these rules to protect the ability of banks to lend to vulnerable customers and businesses, and to ensure that any losses could be absorbed without major repercussions. Around £7.5 billion of expected dividend payments were held up.

Restrictions were started to be lifted in December 2020, but only to allow payouts of a maximum of 25 per cent of quarterly profits. Any 2021 dividends could be accrued but they could not be paid out at that time.

The Financial Policy Committee has said that, while the UK’s banking sector has seen an improvement in economic outlook thanks to the success of the UK’s vaccination programme, there is still a high likelihood that households and businesses will need ongoing loan support. This is especially true now that schemes such as furlough are being wound back by the government.

To help encourage banks to retain a fund for customer and business loans, it has set the countercyclical capital buffer at 0 per cent until at least December. By keeping the rate at 0% it ensures that banks will continue to set aside sufficient capital to lend if the crisis worsens again.

The FPC expects banks to use all elements of their capital buffers as necessary. It is in banks’ collective interest to continue to support viable, productive businesses, rather than seek to defend capital ratios by cutting lending, which could have an adverse effect on the economy.

Further potential risks

As part of the Bank of England’s review of the financial system, it has flagged other potential risks in the coming months which could destabilise the economy.

These include exuberant financial markets, the chance that house prices could surge as the market improves, and the fact that banks are relying more on cloud providers for essential operations.

UK house prices have been rising to the highest levels in the last ten years, and the market is very active as people begin to make delayed moves following lockdowns.

The Bank of England says that despite this increased activity, the market is not yet a concern as household debt remains well below levels before the financial crisis and debt servicing ratios are also still low.

However, they are keeping a close watch on whether “fast-rising prices translate into household indebtedness, which is the thing we’re worried about”, according to deputy governor Sir Jon Cunliffe.

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