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Bank of England removes restrictions on bank dividends and share buybacks

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 latest 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 coronavirus.

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The BoE’s decision follows those of the US Federal Reserve and the European Central Bank, which both relaxed their shareholder payout limits in recent months.

Shares of the large British banks affected — including Barclays, HSBC, Lloyds, NatWest and Standard Chartered — rose after the news, with the FTSE 350 banking index climbing 1.2 per cent.

Last April as the pandemic spread through Europe, the BoE 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 decision to remove all restrictions will allow banks to announce increases to dividends when they report second-quarter earnings later this month. However, many analysts expect boards to behave cautiously as cases of the Delta variant continue to rise, with substantial increases postponed until 2022.

The Financial Policy Committee added that while the rapid rollout of the UK’s vaccination programme has led to an improvement in the economic outlook, households and businesses will still need access to bank loans as and government coronavirus support measures are unwound.

“The FPC expects banks to use all elements of their capital buffers as necessary to support the economy through the recovery,” the BoE said in its twice yearly review of the health of the financial system.

“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 banks, the FPC said that it will 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 until at least until December.

Separately, the report also noted “increased risk taking in global financial markets” and a surge 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 burden remains “significantly below” pre-financial crisis levels and debt servicing ratios are low.

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.

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