LONDON (CU)_In April 2021, as the COVID-19 pandemic had just begun to spread through Europe, the Bank of England (BoE) pressured banks to suspend £7.5bn of dividends in order to preserve their lending capacity and to strengthen their ability to absorb potential losses. Although these restrictions were relaxed in December, the central bank continued to maintain a limit of 25 per cent of quarterly profit on pay-outs.
On Tuesday (13 July), the London-based bank decided to remove all these restrictions on bank dividends and share buybacks, as the regulators took the view that the banking industry is resilient enough to absorb any further pandemic-induced shocks.
“Extraordinary guardrails on shareholder distributions are no longer necessary,” the BoE said in its financial stability report. Citing results of recent stress tests, and the lower-than-expected loan losses, the central bank noted that the sector remains resilient and has the capacity to continue to support the United Kingdom’s economy.
“My view remains the case that [the restriction] was an appropriate step to take with the crisis we faced,” BoE governor Andrew Bailey said during 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.”
According to deputy governor Sam Woods, considering the uncertainty of the current circumstances, the BoE has warned banks to be “appropriately prudent” and make “sensible decisions” in relation to shareholder pay-outs and staff bonuses.
Meanwhile, the Financial Policy Committee, responsible for contributing the central bank’s financial stability objective, has also cautioned that despite the improvement in the economic outlook brought about by the UK’s successful vaccination programme, households and businesses would still be in need of easy access to bank loans, as the government withdraws several support measures that were provided during the pandemic.
“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.”
