Banks including HSBC, Lloyds, NatWest, Santander, Standard Chartered and Barclays were due to pay billions of pounds to pension funds and private shareholders, but elected to suspend dividends and buybacks on ordinary shares until the end of 2020, in order to preserve capital in the face of significant uncertainty.

At the PRA’s request they also cancelled payments of any outstanding 2019 dividends and restricted cash bonus payments to senior staff.
The PRA has now re-assessed the situation having run stress tests on the banks.

These determined that notwithstanding the impact of the Covid-19 pandemic on the global economy, banks remain well capitalised and are expected to be able to continue to support the real economy through this period of disruption.

The PRA judged that banks are resilient to a wide range of economic outcomes, including economic scenarios that are materially more severe than current expectations.

On this basis, despite continuing economic uncertainty and the lack of clarity around Brexit negotiations, the PRA said 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.

The PRA said it is for bank boards to determine the appropriate level of distributions, but cautioned these 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.

To assist with this, the PRA has published a framework of what it calls ‘guardrails’ for bank to use. This states that 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.

Any firm wishing to make shareholder distributions in excess of these guardrails, will be required engage with its supervisors and expect a high bar for justifying any exceptions.

The PRA is also updating its expectations on the payment of cash bonuses to senior staff, including all material risk takers, by large UK banks.

It says it  expects firms to exercise a high degree of caution and prudence in determining the size of any cash bonuses granted to senior staff and cautions it will scrutinise proposed pay-outs closely to ensure large banks have applied the PRA’s remuneration regime in an appropriate fashion.