After assessing the current economic situation as well as the capacity of banks to make capital distributions for 2020, PRA has concluded that there is scope for banks to recommence some capital distributions if their Boards choose to do so, within an appropriately prudent framework. However, 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. As a stepping stone back toward its standard approach to capital-setting and shareholder distributions, PRA is asking Boards, when making their decisions for 2020 distributions, to operate within a framework of temporary guardrails. PRA has published that framework now to give bank Boards time to take it into account as they approach those decisions in coming months.
As per the PRA expectations, 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 the end of 2020, or 25% of the cumulative eight-quarter profits covering 2019 and 2020 after deducting prior shareholder distributions over that period. PRA will expect to be satisfied that any distributions would not create excess vulnerabilities to stress for a given bank or impede its ability or willingness to support households and businesses. PRA has designed these guardrails in line with its primary objective to promote the safety and soundness of firms it regulates. It is the responsibility of banks’ Boards to make distributions that are consistent with this objective. Thus, if any firm wishes to make shareholder distributions in excess of these guardrails, it should engage with its supervisors and expect a high bar for justifying any exceptions.
PRA is also updating its expectations on the payment of cash bonuses to senior staff, including all material risk-takers, by large UK banks. 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. PRA will scrutinize proposed payouts closely to ensure that large banks have appropriately applied the rigorous remuneration regime of PRA.
However, PRA intends to transition back to its standard approach to capital-setting and shareholder distributions through 2021. Under this framework, bank Boards are responsible for making ,distribution decisions subject only to the standard constraints of the regulatory framework, including the regular annual stress test. Following the cancellation of the annual concurrent stress test in 2020, to help lenders focus on meeting the needs of households and businesses during the onset of the COVID-19 pandemic, the Prudential Regulation Committee (PRC) and the Financial Policy Committee (FPC) intend to undertake a full system-wide stress test in mid-2021 and to publish bank-by-bank results at end-2021. Further details will be set out in due course. In the meantime, for 2021 dividends, PRA is content for appropriately prudent dividends to be accrued but not paid out and aims to provide a further update ahead of the 2021 half-year results of large UK banks.
Related Link: Guidance on Capital Distributions
Keywords: Europe, UK, Banking, Dividend Distribution, Share Buyouts, Regulatory Capital, Basel, Stress Testing, COVID-19, PRA
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