Banks could be forced to cut dividends in wake of stress tests

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Banks including Lloyds Banking Group and Barclays could be forced to rein in dividend payouts following stress tests carried out by the Bank of England.

The Telegraph reports the Bank is stress testing the seven biggest banks in the country to see how they would deal with a fictional economic crash which begins in China and emerging markets and spreads around the world.

While banks are expected to pass the stress test without needing to boost capital, they may be told to restrict dividends ahead of tougher stress tests in future.

Lloyds is expected to pay a dividend of 2.5 per cent for this year, but Berenberg analyst Peter Richardson told the newspaper this may have to be cut to 1.5 per cent.

Richardson also expects the stress test to hit investment banks, which could have a knock-on impact on Barclays’ dividend.

He says: “We do think you will have some pressure on capital returns, particularly for banks hoping to return what has been labelled as excess capital to shareholders.

“Our view is that isn’t excess capital and it will accrue to the regulator as they build extra buffers of safety in there.”

The stress test simulates a recession lasting almost two years with high inflation and unemployment of 11 per cent.

It factors in a house price crash to levels of 2002, share prices at 2009 levels and the Bank of England base rate going from 0.5 per cent to over 4 per cent.

The results of the test will be published tomorrow.