On 10 December 2020, the PRA issued a statement regarding capital distributions by large UK banks.
At the end of March, the PRA issued a statement welcoming the decisions of the boards of the large UK banks to suspend dividends and buybacks on ordinary shares until the end of 2020. At the PRA’s request they also cancelled payments of any outstanding 2019 dividends and restricted cash bonus payments to senior staff. In July, the PRA announced that in Q4 2020 it would undertake an assessment of large UK banks’ distribution plans for 2020.
In this latest statement the PRA judges that an extension of the exceptional and precautionary action taken 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.
The PRA states 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, even in the event that this disruption is more prolonged and severe than currently anticipated.
The PRA asks boards, when making their decisions for 2020 distributions, to operate within a framework of temporary guardrails. The PRA has published that framework in order to give bank boards the time to take it into account as they approach their decisions.
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 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. The PRA has designed the above guardrails in line with its primary objective to promote the safety and soundness of firms it regulates and it is the responsibility of banks’ boards to make distributions which are consistent with this objective. Accordingly if any firm wishes to make shareholder distributions in excess of these guardrails, the PRA states that it should engage with its supervisors and expect a high bar for justifying any exceptions.
The PRA has also updated its expectations on the payment of cash bonuses to senior staff, including all material risk takers, by large UK banks. 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.
The 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.