The Bank of England’s Prudential Regulation Authority said its latest test of capital positions had found lenders were more resilient to a ‘wide range of economic outcomes’ © Simon Dawson/Bloomberg

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The UK banking regulator has given lenders the green light to resume dividend payments, nine months after it asked them to suspend shareholder payouts and preserve capital at the height of the coronavirus pandemic.

The Bank of England’s Prudential Regulation Authority on Thursday said its latest test of banks’ capital positions had found they were resilient to “a wide range of economic outcomes, including economic scenarios that are materially more severe than current central expectations”.

As a result, it concluded that there was now scope for banks to recommence distributions to shareholders “within an appropriately prudent framework”.

Among the factors considered by the regulator were the recent approval and rollout of a Covid-19 vaccine in the UK, and the extension of government loan and furlough support schemes for businesses. “We know more and things look better than March,” one person familiar with the process said. 

“We are still in the midst of a pandemic and Brexit so, while the case for a full ban is weak, you do not want a huge amount of capital flowing out,” the person explained.

As part of the approval, the PRA set out guidelines to determine the size of any payout. It said it would “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 regulator set a dividend limit of 25 per cent of a bank’s cumulative profits over the previous two years or 0.2 per cent of its risk-weighted assets — whichever is the higher.

The PRA pressured banks in late March to suspend dividends and share buybacks until the end of 2020, and cancel any unpaid 2019 distributions, to prevent the depletion of their capital at a time when lending was needed to support the economy. They were also asked to restrict cash bonus payments to senior staff.

The regulator on Thursday again urged banks to use a “high degree of caution and prudence” when deciding on cash bonuses for senior staff, given the uncertain outlook and need for banks to deploy capital to the wider economy.

The watchdog said it would “scrutinise proposed payouts closely to ensure large banks have applied the PRA’s rigorous remuneration regime in an appropriate fashion”.

The UK’s five largest banks initially resisted pressure from the BoE to halt their dividends voluntarily, but eventually announced they were cancelling dividends worth £7.5bn so they could “serve the needs of businesses and households”.

UK bank share prices have fallen sharply as the economy has suffered during the pandemic. Shares in Barclays are down 23 per cent since the start of the year, while HSBC’s are down 32 per cent over the same period. Standard Chartered’s and NatWest’s have fallen 34 per cent and Lloyds’ are 44 per cent lower.

Standard Chartered welcomed the move. “Given our strong capital position the board will consider resuming shareholder returns on 25 February 2021 when we release our full-year 2020 results,” the bank said.

A NatWest spokesperson said decisions on dividends would be taken by the board, while Lloyds previously indicated a similar policy when it announced its third-quarter results last month.

EU banks were also prevented from paying out dividends this year and the European Central Bank is expected to decide whether it will lift its ban next week. The PRA had been in dialogue with the ECB prior to making its own decision on Thursday.

Swiss banks UBS and Credit Suisse have already announced their intention to resume dividend payments next year and distribute half of the 2019 dividend that they held back in April.

Additional reporting by Nicholas Megaw

Letter in response to this article:

Remember small business in the bank payout debate / From Peter Udale, Director, Responsible Finance Winchcombe, Gloucestershire, UK

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