Shares in the FTSE’s banking giants rose this morning after the Bank of England (BoE) said they could pay out dividends and bigger bonuses as well as share buybacks, bookending the curbs placed on them at the start of the Covid-19 pandemic.
Lloyds and HSBC were among the biggest risers in the FTSE 100, experiencing a bump shortly after the BoE’s announcement, but sloped down as the day went on.
RBS owner NatWest and Barclays similarly started the day strong but eventually dropped below previous close prices around midday.
Threadneedle Street’s decision to drop those restrictions follows similar moves in the US.
In its financial stability report for July 2021, the BoE said banks are capable of supporting UK businesses and households throughout the economic recovery from the coronavirus pandemic.
Even in outcomes worse than the Monetary Policy Committee’s central forecast, banks were found to be resilient enough in BoE stress testing.
The BoE is encouraging banks to continue to lend to households and businesses, even in challenging circumstances.
However, the bank noted that risks to recovery remain. This is especially true if cases continue to soar while the government rolls back support measures introduced through the pandemic.
Increased risk taking in financial markets was also noted, with some risky asset valuations appearing higher than previous performance. The BoE said this may “reflect a search for yield in a low interest rate environment and higher risk-taking”.
In a letter to chancellor Rishi Sunak, BoE governor Andrew Bailey, said:
“In recent months, the rapid rollout of the UK’s vaccination programme has led to an improvement in the UK economic outlook. But risks to the recovery remain.
“Households and businesses are likely to need continuing support from the financial system as the economy recovers and the Government’s support measures unwind over the coming months.
“Based on its monitoring of bank resilience, the FPC judges that the UK banking system has the capacity to provide that support. The banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast.”
The BoE also said it is working to make market-based finance more resilient and less likely to amplify shocks.
Alongside UK and international authorities, it is working to reduce liquidity demand and improve liquidity supply in stress. It is also assessing if central banks will need new tools to support liquidity and market functioning as a last resort.
Beyond these risks, the BoE is also stress testing banks to check if the system is prepared for the future economy. This involves checking banks’ resilience to climate change and exploring the role of digital money.
Bailey said the BoE “stands ready to take any further actions deemed appropriate to support UK financial stability”.