The Bank of England has cautioned financial services companies against paying out too much in dividends in its Financial Stability Report.
The report – which comes out twice a year and is intended to help support stability in the financial sector – suggests there may be more pain to come for banks from overextended borrowers.
‘[It] is in banks’ collective interest to build resilience gradually through retention of earnings, which would be boosted if banks restrain distribution of profits to equity holders and staff,’ notes the report.
Interest payments are currently very low, which may be disguising the number of homeowners, companies and countries that are in financial difficulties, states the bank. This means lenders should work to build their reserves as a buffer against any future shocks.
Capital reserves should also be increased to guard against any new debt crises affecting European countries or their banks following the recent bailout of Ireland, the bank adds.
‘In this environment, it is important that resilience among UK banks has improved over the past year, including progress on refinancing debt and on raising capital buffers,’ it says.
‘But the United Kingdom is only partially insulated given the interconnectedness of European financial systems and the importance of their stability to global capital markets.’
