Dividends and UK banks can withstand severe economic fallout from pandemic

In a number of recessions, the banks stopped credit to save on loan losses and when the banks stop lending money there are few low interest rate options. Government agencies can help but traditionally they take time and help on a limited number of companies. The government of the day looks at its big banks and banking sector to keep lending or keep liquidity in the market. There are many challenges but having access to capital should not be the major concern. After the 2008, banking collapse because of the mortgage back securities write offs, the government imposed stricter regulations. The banks which have been enjoying making money, have been lobbying to take the restrictions off and until President Trump he would rather deregulate than regulate.

Fortunately, some of the restrictions remain and in recent article from Reuters, the UK banks which all went bankruptcy and needed to be essentially owned by the government are now in a position to keep lending if the economy were to shrink by 30%, according to a stress test carried out by the Bank of England.

The good news is even though core capital ratios would drop from 14.8% to 11%, the numbers are still higher than the minimum regulatory requirements. The banks could also incur total credit losses of 80 million pounds or $138.2 billion, however they would have cushions to absorb the losses.

Analysts in the US believe the US banking sector is still fundamentally sound, although bank stocks are down for other reasons. The rising unemployment rates and what does that mean to the general economy. In the words of the President, how is the economy going to be great again, since no economist believes all the jobs are coming back.

Linking to dividend paying stocks, companies that can pay dividends and generate profits on a consistent basis have shown they can weather many storms. The bigger the storm, the more they rely on the government to help, both it and its customers. As an investor, you like to see strong regulations which help keep out the competition or only allows the competition to compete on the margins. You might say you do not like regulations, but competition is a double edge sword and sometimes you fall on it.

There are more questions than answers, till the next time – to raising questions.

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