Banks have been given the green light to start paying normal dividends after the Prudential Regulation Authority deemed them financially resilient.
In December the regulator said dividends could restart following a nine-month ban during the pandemic last year, but introduced limitations on the payouts. Those restrictions have been removed with “immediate effect”, the PRA said today.
Its statement came alongside the Bank of England’s Financial Stability Report, which found that banks were “resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast”.
Banks could withstand £70 billion of losses on top of the £20 billion they took last year in impairments, the Bank’s Financial Policy Committee found in an interim stress test conducted on the country’s biggest lenders.
“The total impact of the stress would use up less than 60 per cent of banks’ aggregate capital buffers,” the FPC said. That health check has cleared the way for banks’ boards to be able to resume making their own decisions about distributions to shareholders, in a move which analysts said would boost the sector’s share prices.
Businesses and individuals have largely emerged on solid ground from the near-18-month pandemic but there are pockets of concern, according to the FPC. Overall debt levels have only increased “modestly”, but that masks a build-up in certain areas, including small businesses and sectors such as hospitality which had been hit the hardest by successive government lockdowns of the economy.
Small and medium-sized enterprises’ debt has risen by about a quarter overall, although a lot of that is in low-interest government guaranteed Bounce Back loans. House prices are surging, but the number of high risk mortgages is still lower than before the pandemic, the FPC found. About one in 20 home loans are above 90 per cent loan to value, compared with one in five in 2019.
It is in banks’ “collective interest” to continue to lend to support customers as they try to recover from the pandemic, rather than trying to conserve their own capital, the FPC said.
The committee highlighted the volatility and price surges in cryptocurrencies, warning it could “highlight potential pockets of exuberance”. While most crypto assets are held by retail investors, banks and other big investors and payments firms are moving into the sector, which could increase links with other parts of the financial system, the FPC said. However, it does not at this stage see the fast-growing digital asset class as a risk to financial stability.
The Financial Stability Report is published every six months to consider present issues affecting the economy and identify potential future threats. The issues it has highlighted range from debt levels among consumers to the need to maintain strong regulations. Brexit has been a major topic.
The report is published by the FPC, which was created in 2010 as a way to bring together a group of experts to monitor the safety of the financial system. It is made up of 12 members, including from within the Bank of England and Treasury and external appointments, from the world of business and academia.
The FPC has the power to direct the PRA, which monitors the financial system, and the Financial Conduct Authority, which focuses on consumers. It was created to be as powerful as the Bank’s Monetary Policy Committee, which sets interest rates.