Bank of England removes restrictions on bank dividends and share buybacks
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The Bank of England has removed restrictions on bank dividends and share buybacks imposed during the pandemic, judging the sector to be resilient enough to absorb any further Covid-19 shocks.
“Extraordinary guardrails on shareholder distributions are no longer necessary,” the BoE said in its financial stability report, published on Tuesday.
The central bank cited the results of recent stress tests and lower than expected loan losses. “The banking sector remains resilient . . . [and] has the capacity to continue to provide support” as the UK economy recovers from the Covid crisis.
“My view remains the case that [the ban] was an appropriate step to take with the crisis we faced,” BoE governor Andrew Bailey said at a press conference. “Bank capital positions today are as high as they have ever been, partly due to government support shielding the system from pain it otherwise would have taken . . . Headwinds will emerge, but will be manageable.”
Deputy governor Sam Woods added that the BoE had told bank boards it expected them to be “appropriately prudent” and make “sensible decisions” about shareholder payouts and staff bonuses considering the uncertain environment.
The BoE’s action follows those of the US Federal Reserve and the European Central Bank. The Fed has already scrapped its payout limits, while the ECB said it planned to do so in October.
Shares of the affected lenders — including Barclays, HSBC, Lloyds, NatWest and Standard Chartered — rose after the news, with the FTSE 350 banking index climbing 1.2 per cent.
As the pandemic spread through Europe, the BoE last April pushed banks to suspend £7.5bn of dividends to preserve lending capacity and absorb potential losses.
The BoE started to relax the restrictions in December, but maintained a limit on payouts to 25 per cent of quarterly profit and only allowed 2021 dividends to be accrued, not paid.
The Financial Policy Committee cautioned that while the UK’s vaccination programme had led to an improvement in economic outlook, households and businesses will still need easy access to bank loans as government coronavirus support measures are unwound.
“The FPC expects banks to use all elements of their capital buffers as necessary,” the BoE said. “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.”
To encourage this, the FPC said it would keep the so-called countercyclical capital buffer — a tool designed to make sure banks set aside sufficient capital during good times to ensure they can lend during crises — at 0 per cent at least until December.
Bailey also said there had been no progress on discussions with the EU about granting financial equivalence to UK companies after Brexit. Previous versions of the report flagged this as a potential systemic financial risk, especially for London’s clearing of financial derivatives.
“We are ready to have any discussions that the EU would like to have, but at the moment there is nothing happening on that front that I am aware of,” he said.
The BoE’s twice-yearly review of the health of the financial system flagged other potential risks, including exuberant financial markets, surging UK house prices and the increased use of cloud providers for essential bank operations.
The report noted “increased risk-taking in global financial markets” and a boom in prices for high-yielding assets. It warned that asset valuations could “correct sharply if market participants re-evaluate the prospects for growth or inflation”, leading to interest rate rises.
While UK house price growth and market activity during the first half of the year were at the highest levels in a decade, the BoE said it was not yet a matter for concern. Households’ debt burdens remain “significantly below” pre-financial-crisis levels and debt servicing ratios are low.
Still, deputy governor Sir Jon Cunliffe said the BoE was “keeping a very close eye” on whether “fast-rising prices translate into household indebtedness, which is the thing we’re worried about”.
The double-digit surge in house prices has been driven by a temporary cut to UK stamp duty, low interest rates, a build-up of savings during the pandemic and a desire by many to move to larger houses in anticipation of more flexible working arrangements in the future, according to the report.
The BoE revealed that it believed “greater direct regulatory oversight” was required of large cloud computing providers, such as Amazon Web Services and Google, as banks increasingly outsource significant chunks of their operations to save costs.
“We will have to roll some of that secrecy that goes with it back,” Bailey said. “We have to strike a careful balance between enough openness that the users and regulators can understand the risk and resilience of the system” while being careful not to open cloud providers to cyber risks.
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