Banks Banned from Paying Dividends
17/10/2008
The banks set to benefit from the UK government's bail-out package are to be banned from paying dividends for up to five years under European laws.
The EU intervention could put the Government's plan in jeopardy as it is usually necessary to pay dividends in order to attract private investors. The Lloyds TSB-HBOS merger could also be under threat.
Both individual investors and pension funds require dividends in order to get a return on their investment. The banks are therefore involved in urgent talks with the Treasury to renegotiate the terms of the bail-out.
Labour MP John McFall, who is chairman of the Commons Treasury select committee, believes dividends should be paid: "The Government wants the first cut for the taxpayers, and they don't want anything to get in the way, but if we are to have confidence in financial companies then we have to ensure that dividends are paid to make it attractive for investors to come in," he said.
Under the terms of the bail-out, the government will buy "preference" shares in Lloyds TSB, RBS and HBOS. Preference shares differ from ordinary shares in that the banks must pay a fixed rate of 12% interest to the government. The preference shares cannot be repaid for at least five years, but the European Commission has ruled that the bailout can only proceed if dividends are banned until the preference shares are repaid.
The EU intervention could put the Government's plan in jeopardy as it is usually necessary to pay dividends in order to attract private investors. The Lloyds TSB-HBOS merger could also be under threat.
Both individual investors and pension funds require dividends in order to get a return on their investment. The banks are therefore involved in urgent talks with the Treasury to renegotiate the terms of the bail-out.
Labour MP John McFall, who is chairman of the Commons Treasury select committee, believes dividends should be paid: "The Government wants the first cut for the taxpayers, and they don't want anything to get in the way, but if we are to have confidence in financial companies then we have to ensure that dividends are paid to make it attractive for investors to come in," he said.
Under the terms of the bail-out, the government will buy "preference" shares in Lloyds TSB, RBS and HBOS. Preference shares differ from ordinary shares in that the banks must pay a fixed rate of 12% interest to the government. The preference shares cannot be repaid for at least five years, but the European Commission has ruled that the bailout can only proceed if dividends are banned until the preference shares are repaid.
