Bank shares rally as Bank of England abandons payout controls

With very few people out and about the scene in the City of London financial district is one of quiet, outside the Royal Exchange near the Bank of England with the statue of the Duke of Wellington as the national coronavirus lockdown eases on 2nd July 2021 in London, United Kingdom. As the coronavirus lockdown continues its process of easing restrictions, the City remains far quieter than usual, which asks the question if normal numbers of people and city workers will ever return to the Square Mile. (photo by Mike Kemp/In Pictures via Getty Images)
The Bank of England has abandoned COVID-era restrictions on payouts to shareholders and staff. Photo: Mike Kemp/In Pictures via Getty Images

Shares in UK banks rallied on Tuesday as the Bank of England said it was abandoning COVID-era restrictions on how much lenders could payout to staff and shareholders.

The Bank of England said in its latest Financial Stability Report it was abandoning so-called 'guardrails' introduced at the end of last year to limit payouts.

"Extraordinary guardrails on shareholder distributions are no longer necessary," the report said.

Sam Woods, a deputy governor at the Bank of England and head of the Prudential Regulation Authority (PRA), told journalists: "We think it's quite important to get to a more normal setting for these [payouts], which includes quite a lot of quite strong regulation about deferral and clawback and malice and things of those kinds but does leave those decisions with the boards of banks,"

Shares in banks shot to the top of the FTSE 100 (^FTSE) in response to the news. Lloyds (LLOY.L) topped the bluechip index with a rise of 1.9%, NatWest (NWG.L) rallied 1.6%, HSBC (HSBA.L) gained 1.4% and Barclays (BARC.L) rose 1.4%.

Bank shares shot higher on the announcement. Photo: Yahoo Finance UK
Bank shares shot higher on the announcement. Photo: Yahoo Finance UK

Rule setters at the Bank of England's Prudential Regulation Authority (PRA) last year blocked banks from making payouts to shareholders as the COVID-19 pandemic struck. The PRA instead told lenders to hang on to capital to weather against a potential wave of defaults.

Read more: BoE: UK banks in good shape despite increase in risk taking

Extraordinary government loan and support schemes meant the UK economy faired better than expected last year and the PRA lifted its ban on payouts in December, instead saying banks could make limited payouts controlled by 'guardrails'. The guardrails imposed limited on payouts based on past profitability and risk weighted assets.

Tuesday's decision to axe guardrails means bank boards now have full discretion to decide on payouts. Several lenders have already announced plans to reinstate dividends since December's relaxation.

"We expect bank boards to be appropriately prudent in distributions they make both to their shareholders and to their staff, given the vital role that banks are going to play in supporting the recover," said Woods.

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