The Bank of England’s Prudential Regulation Authority is to allow UK banks to resume dividend payments.
In March, the UK’s five largest banks HSBC, Barclays, NatWest, Lloyds and Standard Chartered were leant on by the PRA to cancel dividends worth £7.5bn in total.
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At the time, a number of the banks lobbied against the dividend ban, arguing that their balance sheets were sufficiently strong to afford the dividends.
The PRA resisted the bank pressure and said that the suspension of dividends was necessary to reduce the ‘possibility of an unsafe depletion of banks’ capital in the face of a risk of unknown dimensions’.
The PRA has now carried out two stress tests of banks’ capital positions. It finds that banks are resilient to a wide range of economic outcomes, including economic scenarios that are materially more severe than current central expectations. Based on these assessments, the PRA’s assessment is that banks remain well capitalised and able to support the economy.
It is now for bank boards to determine the appropriate level of distributions – up to a point.
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By GlobalDataPRA ‘temporary guardrails’
The PRA says that: “Any distributions should be prudent, reflecting the still elevated levels of economic uncertainty and the need for banks to continue to support households and businesses through the continuing economic disruption.”
The PRA has released details of what it terms temporary guardrails. Specifically, in relation to full-year 2020 results, distributions to ordinary shareholders by large UK banks should not exceed the higher of: 20 basis points of risk-weighted assets as at end-2020; or 25% of cumulative eight-quarter profits covering 2019 and 2020 after deducting prior shareholder distributions over that period.
The PRA is also updating its expectations on the payment of cash bonuses to senior staff, including all material risk takers.
“The PRA expects firms to exercise a high degree of caution and prudence in determining the size of any cash bonuses granted to senior staff given the uncertain outlook and the need for banks to deploy capital to support the wider economy. The PRA will scrutinise proposed pay-outs closely to ensure large banks have applied the PRA’s rigorous remuneration regime in an appropriate fashion.”
