Pay no dividends Bank of England tells City institutions
THE Bank of England fired two warning shots across the bows of the City today, telling financial institutions to suspend dividend payments and banks to be kind to borrowers needing repayment holidays.
In moves consistent with the Bank’s approach to the crisis thus far, it made plain that it does not think share clearing and settlement houses should be handing out profits to investors.
A “Dear CEO” letter from Sir Jon Cunliffe, the deputy governor for financial stability, said he expects them and other financial market infrastructures to “pay close attention” to the additional market risks from Covid-19.
The short, plainly worded letter, said they must must get permission before paying a dividend, with a clear hint that such permission would be denied for the rest of this year at least.
“We would expect you to discuss with us in advance of making any distribution to shareholders.” Said Sir Jon.
City analysts weren’t surprised, but noted that the move is unlikely to help sentiment.
Separately, the Bank said it will be demanding further details from lenders on what losses they expect from the pandemic.
Sam Woods, the deputy governor and CEO of the Prudential Regulation Authority, said data will be gathered before the bank’s report second quarter earnings.
“This information will enable us to identify any significant outliers and to further refine our estimates for future capital exercises,” Woods said in a letter to banks.
That is to ensure the banks meet the requirements of new accounting rule IFRS 9, an already fiendishly complex set of laws, while maintaining lines of credit to the public.
The first round of mortgage payment holidays taken up by millions of Brits looking to conserve cash come to an end this week.
Banks have already been told to extend those holidays for a further three months, amidst warnings from financial advisers about higher bill payments later.
A ban on home repossession has also been extended to the end of October.
Woods repeated the guidance that the banks should not assume that payment holidays are in effect a default on a loan, and should therefore delay making oveorly negative assumptions about their own bad debts.
Banks have already set aside many billions to cover the rise in defaulted loans.
The Bank of England last month estimated that those losses could hit £80 billion in total by next year, but it believes the major lenders are strong enough to come through without direct government support.
Yesterday, Bank governor Andrew Bailey told the big lenders to up their preparation for a no-deal Brexit amid growing signs of deadlock between the UK government and Brussels.
