Reports this morning detail how Britain’s big banks are ‘bartering’ with the Bank of England’s Prudential Regulatory Authority (PRA) for approval to recommence halted dividend payments from 2021. As the Covid-19 pandemic reached the UK in spring, Sam Woods, who heads up the regulator, insisted the UK’s banking sector halt dividend payments, with the funds diverted towards increasing capital buffers able to absorb more bad loans, while maintaining lending.
The original order that obliged banks to cancel any dividends outstanding for 2019 and to suspend any 2020 returns to shareholders, came with a timetable that the situation would be reviewed in the fourth quarter. Having now entered the last three months of the year, The Times this morning reports that the big banks are now “bartering” with the Bank of England and PRA over an agreement that would allow them to resume dividend payments in the new year.
Any agreement would be on the understanding that dividend payments to not compromise either lending to the ‘real economy’ or deepened capital buffers as a safeguard against the possibility of spiralling bad loan rates. The proposal is that dividends be permitted on the condition capital ratios are maintained above an agreed level and net lending rises.
Unofficial capital floors are already in place for high street banks, above which surplus capital can be distributed to shareholders. Negotiations centre around now lowering that floor to a level that would keep retail banks insulated against any shocks to their balance sheet, while still leaving enough wiggle room to allow for the payment of dividends while increasing lending.
The capital ratio required of big banks is currently around 13% but it is being argued that a ‘one size fits all’, approach is hurting banks. One banker is reported in The Times as commenting:
“There is bartering going on between the Bank and the banks. At the moment, it’s one-size-fits-all. If you can demonstrate you can lend and restart the dividend, they could approve it.”
Banks are worried they have become unattractive to investors as a result of being forced to halt dividend payments. The sector currently trades at about half its book value.
Over the first half of 2020, capital ratios at Britain’s banks improved despite £18 billion being set aside to cover losses on existing loans and the economic slump which accompanied the pandemic lockdown period. The Bank of England’s financial policy committee (FPC) said this month that was largely the result of dividends being retained.
Banks are expected to have to swallow additional losses of £45 billion if, as currently predicted, the UK economy shrinks by 9.5% this year. Banks currently have £200 billion in capital buffers. The FPC said in August that the buffers built up by banks would suffice, even if the recession was twice as severe as expected, stating:
“Cumulative losses incurred by the major banks since the beginning of the pandemic would deplete only around 60 per cent of their buffers of capital”.
Officials understand the need to balance the dual consideration of encouraging banks to use any additional fat in their current capital buffers to lend more with the acceptance they may be less enthusiastic to do so if they are concerned depressed share prices may hinder their ability to raise equity to recapitalise once the pandemic has passed.
Regulators are wary of a repeat of the 2008 ‘credit crunch’, which saw a deeper recession than might have been the case as a result of banks withdrawing much of their lending. Now they are trying to decide if allowing banks to resume dividend payments would have a positive impact on lending by providing the confidence they will be able to rebuild their balance sheets by asking investors for money when things return to normal.
When invited to comment, the PRA simply referenced Mr Woods’ July statement that dividend guidance would be reviewed this quarter.
Meanwhile, Lloyds Banking Group has told a majority of its 65,000 strong workforce that they will not return to the office until next spring at the earliest. The move follows the most recent government guidance, urging office workers to continue or return to working from home if practically possible.
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