U.K. Banks Freed From BOE’s Pandemic Dividend Restrictions

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Britain’s biggest banks will be able to increase shareholder payouts after the Bank of England removed restrictions imposed at the height of the pandemic to make sure lenders could weather deep losses.

The BOE said Tuesday it is fully removing guardrails that limited dividends this year at HSBC Holdings Plc, Barclays Plc, Standard Chartered Plc and other top lenders. The central bank concluded the industry now has enough capital to resume payments as they wish.

The central bank’s Prudential Regulation Authority said its limits “in relation to full-year 2020 results are no longer necessary and have been removed with immediate effect,” according to a statement. The move comes a day after the European Central Bank signaled its caution over a quick return to dividends.

The rollout of vaccinations and results of interim stress tests bolstered the PRA’s view that banks could return to a standard approach to capital-setting and shareholder distributions. The BOE began to relax its de facto ban on dividends in December, but kept a cap of about 25% of quarterly profit and said 2021 dividends could be accrued but not yet paid.

U.K. Banks Freed From BOE’s Pandemic Dividend Restrictions

Shares in British banks initially rose after the announcement, before paring some gains. NatWest Group Plc was trading 0.7% lower at 1:36 p.m. in London, while Lloyds Banking Group Plc was 0.7% higher, HSBC was up 0.6%, Barclays rose 0.1% and Standard Chartered was up 0.2%.

“We had a framework in place and we’re going back to that,” Governor Andrew Bailey told reporters. “This is not a free for all at this point, by any means.”

Optimistic Approach

The BOE’s move compares to a more cautious approach by the European Central Bank, which has capped payouts through September while also extending relief from bank leverage restrictions to help firms continue lending. A top official said Monday the ECB could take steps to ensure that lenders avoid paying excessive dividends later this year, when it will “most likely” lift its cap.

The U.S. Federal Reserve, meanwhile, has relaxed restrictions in a sign that authorities are more optimistic about the industry’s ability to manage borrower defaults while also rewarding shareholders. While Covid-19 ravaged the economy and stoked the U.K.’s worst recession in 300 years, emergency steps by the government and industry have kept loan losses so far well below worst estimates.

Still, authorities have warned that defaults could increase once temporary help such as payment holidays expire.

The PRA said Tuesday that banks should “continue to exercise an appropriate degree of caution around the level of any shareholder distributions,” and that “it is essential that banks continue to support households and businesses through the economic recovery and as the government’s support measures unwind over the coming months.”

Health Check

The PRA statement came as the Bank of England released its latest health check on the U.K. financial system, known as the Financial Stability Report.

The central bank “continues to judge that the banking sector remains resilient” to worse crises, and can weather the credit losses that are currently below the levels initially feared at the beginning of the pandemic.

While the U.K. economy is rebounding from 16 months of lockdowns, the BOE has flagged that millions of Britons remain vulnerable to financial distress. Businesses, meanwhile, have accrued almost 80 billion pounds ($111 billion) of emergency loans, backed by the government, to keep them afloat during the pandemic.

Most of England’s remaining limits on socializing are due to be lifted on July 19 and the furlough program will stop in September, having supported 30% of the U.K. workforce at its peak last year.

Fund Reform

The BOE is also recommending that open-ended funds are better designed to prevent a rush for withdrawals during periods of market stress such as the early stages of the pandemic. The central bank wants a more granular classification of the assets in each fund so it’s clearer how long it would take sell them to meet redemption requests.

The bank said it also wants a better swing price mechanism and longer redemption periods to deter investors from yanking their funds when markets are in turmoil.

The report also said:

  • corporate debt vulnerability has increased “modestly” and there are signs of increased risk-taking in global markets as search for yield continues
  • BOE continues to calibrate measures to avoid build-up of risk in mortgage market, but share of households with high debt-servicing burdens has risen only slightly
  • BOE “strongly supports” global work to reform money market funds after last year’s dash for cash
  • some recently created replacements for Libor, such as those used in some U.S. dollar markets, “are not robust or suitable for widespread use as a benchmark”
  • concentration of cloud service providers could be a financial stability risk and more policy measures are needed
  • BOE welcomes changes to banks’ leverage framework, currently out for consultation

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