In July, the PRA announced that in the fourth quarter it would undertake an assessment of large UK banks’ distribution plans for 2020. This assessment would be based on: the current and projected capital positions of the banks; the level of uncertainty on the future path of the economy; market conditions; and capital trajectories prevailing at that time. The PRA has now completed that assessment.
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 Prudential Regulation Committee (PRC) and Financial Policy Committee (FPC) have now carried out two stress tests of banks’ capital positions and have judged that banks are resilient to a wide range of economic outcomes, including economic scenarios that are materially more severe than current central expectations. Based on these assessments, although some headwinds to banks’ capital positions are expected during 2021, the PRA’s assessment is that banks remain well capitalised and able to support the economy.
Set against that, economic uncertainty as a result of the Covid-19 pandemic remains high, economic disruption continues and widespread government economic support is still in place. In addition, considerable uncertainty remains about the new relationship with the EU to which the UK will need to adapt in the coming months.
Weighing those considerations, and consistent with the PRA’s view that distributions are an important and necessary part of the functioning of the banking system, 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 full statement is available at https://www.bankofengland.co.uk/prudential-regulation/publication/2020/pra-statement-on-capital-distribution-by-large-uk-banks