Removal of restrictions on dividend payments in the UK banking sector
The Bank of England has released its Financial Stability Report from July 2021. The report, published twice a year, sets out its view on the outlook for UK financial stability, including its assessment of the resilience of the UK financial system. In this edition, one of the highlights has been the removal of restrictions on the payment of bank dividends and the repurchase of shares imposed during the pandemic, judging the sector to be resilient enough to absorb any further Covid-19 shocks.
The main arguments to explain the removal of restrictions on the payment of bank dividends imposed during the pandemic are as follows:
- The UK banking sector has been resilient to the challenges posed by Covid and has provided support to households and businesses to weather the economic disruption from the pandemic. Despite an historic fall in UK output in 2020, banks’ capital and liquidity positions remain strong.
- Strong capital position will allow the sector to be resilient and to absorb any further Covid-19 shocks. According to the Bank of England (BoE), “Banks are sufficiently capitalized to continue supporting the economy as needed”. UK banks aggregate Common Equity Tier 1 (CET1) capital ratio at the end of 2020 was 16.2%, more than three times higher than before the global financial crisis. The interim results of the 2021 solvency stress test show the aggregate CET1 ratio falling from that level to a low point of 10.4% in 2022, well above the legal minimum required (7.7%). On the back of these solvency stress test results and bearing in mind a central scenario of economic recovery, “the extraordinary guardrails on shareholder distributions are no longer necessary”.
- To support the flow of credit to the economy, the BoE will maintain the countercyclical capital buffer rate at 0% until at least December 2021, encouraging banks to use all elements of their capital buffers as necessary to support the economy through the recovery, rather than seeking to defend capital ratios.