PRA statement: Update on shareholder distributions by large UK banks

The Prudential Regulation Authority (PRA) published a statement on 10 December 2020 on “Capital distributions by large UK banks”.^{footnote [1]} In that statement the PRA: set out guardrails for distributions to ordinary shareholders in relation to full-year 2020 results; stated that for 2021 dividends the PRA was content for appropriately prudent dividends to be accrued but not paid out; and said that it aimed to provide a further update ahead of the 2021 half-year results of large UK banks.

The PRA has reviewed its approach to shareholder distributions. It paid particular attention to: developments in, and uncertainty around, the economic outlook, including the evolution of the Covid pandemic and policies to mitigate the health impact – most notably vaccination programmes; and banks’ capital positions and trajectories, drawing on the interim results of the 2021 solvency stress test (SST).^{footnote [2]}

Taking into account the interim results of the 2021 SST, the PRA judges that banks remain well capitalised and resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast, and that they should therefore be able to support households and businesses through the economic recovery. In addition, although considerable uncertainty remains, the level of uncertainty has decreased significantly since December 2020, in particular due to the progress of vaccination programmes.

The PRA has therefore concluded that the extraordinary guardrails within which it asked bank boards to determine the appropriate level of distributions in relation to full-year 2020 results are no longer necessary and have been removed with immediate effect.

This is consistent with the PRA’s intention, as set out in its 10 December 2020 statement, 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 to the standard constraints of the regulatory framework, including the regular annual stress test. The full and final results of the 2021 SST, including bank-specific outcomes, will be published in 2021 Q4. In the meantime, it is essential that banks continue to support households and businesses through the economic recovery and as the Government’s support measures unwind over the coming months, including in the event that economic outcomes are more severe than currently expected. Bank boards should therefore continue to exercise an appropriate degree of caution around the level of any shareholder distributions.