The PRA decides not to extend the distribution restrictions

As a response to the Covid-19 pandemic, the PRA made a public statement in relation to banks’ distributions in March 2020 and sent letters to the CEOs of seven large deposit-takers (Lloyds, RBS, Santander, Barclays, HSBC, SCB, Nationwide), requesting that these institutions cancelled dividend payments of any outstanding 2019 dividends and encouraged their boards to consider suspending dividends and buybacks of ordinary shares until the end of 2020. The PRA welcomed the announcements by the large UK deposit takers, issued on 1 April 2020, suspending their distributions which were made as a result of these letters. For more detail please see our previous alert here

In July, the PRA announced that in the fourth quarter of 2020 it would undertake an assessment of large UK banks’ distribution plans for 2020. The PRA has now completed that assessment and has concluded that notwithstanding the impact of the Covid-19 pandemic on the global economy, UK banks remain well capitalised and are expected to be able to continue to support the real economy. Therefore, despite the continuous economic uncertainty as a result of the Covid-19 pandemic, the PRA considers that an extension of the distribution restrictions required in March is not necessary and that there is scope for banks to recommence some distributions should their boards choose to do so, within an appropriately prudent framework.

Bank boards will now have a discretion on distribution decisions. However, in order to ensure that banks will be able to continue to support households and business during the pandemic, the PRA requires boards, when making their decisions for 2020 distributions, to operate within a framework of temporary guardrails: 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. 
    If a bank wishes to make shareholder distributions in excess of these guardrails, it should engage with its supervisors and a high bar for justifying any exceptions should be expected. In any case, distributions should not inhibit the bank’s ability to remain capitalised and continue to support the real economy. 

In respect of payments of cash bonuses to senior staff, including all material risk takers, by large UK banks, the PRA has also removed the restrictions announced in March, but expects firms to exercise a high degree of caution and prudence in determining the size of any cash bonuses granted to senior staff. 

Finally, the PRA intends to transition back to its standard approach to capital conservation and shareholder distributions through 2021, which means in practice that distribution decisions will only be subject to the standard capital constraints of the regulatory framework, including the regular annual stress test. Annual stress testing for banks has been postponed as part of the relief measures for lenders as a response to Covid-19. However, a full system-wide stress test is scheduled for mid-2021 with bank-by-bank results to be published at end-2021. In the meantime, in respect of 2021 dividends, the PRA statement confirms that appropriate dividends can be accrued but not paid out. The PRA will provide a further update ahead of the 2021 half-year results of large UK banks.