What's going on?
The biggest British banks were in complete harmony this week, collectively disappointing shareholders with an agreement not to pay their all-important dividends this year.
What does this mean?
Given the Bank of England’s efforts to support the UK economy, and commercial banks’ role in handing out loans to companies and people, Britain’s financial regulator suggested banks suspend their regular cash payouts to shareholders and instead keep cash on hand to help weather the storm. Banks including HSBC, Barclays, and Lloyds did as they were told – and they’ll probably forgo paying hefty bonuses to their executives too.
With UK banks voluntarily complying, the country’s regulator won’t need to impose a blanket ban on dividends and share buybacks. That’s different from Europe – where the European Central Bank put its foot down – and the US too, where any companies taking aid will face restrictions on dividends and buybacks until after they’ve repaid the government.
Why should I care?
The bigger picture: Moral hazards.
After taxpayers bore the brunt of the government bailout of banks following the global financial crisis – and precious few criminal charges were brought against those who might’ve been responsible – some people worried a government safety net would mean they’d be more likely to misbehave in the future. So it perhaps stands to reason that those same governments would limit bank executives and shareholders from benefiting from any potential financial windfall in the near term – especially considering how much help central banks and governments are giving them to mitigate the coronavirus’s impact.
For markets: In-come again?
British banks’ now-paused dividends make them less attractive to investors, which was probably why their stocks fell on Wednesday. Dividends, after all, are a big deal to investors all over the world: some people rely on regular payouts to fund their living costs, and others – like insurance companies – use them to help cover the costs of claims (tweet this).