Coronavirus outbreak has made the central banks of the UK to suspend the instalments to the investors. The Bank of England has invited the decision, too. The Bank of England has requested other banks to do the same for this time of period.
The Prudential Regulation which is a part of the Bank of England has announced that they are taking preventive measures to support the extensive economy of the UK. The bank of England has suspended the payment to the shareholders. Additionally, the bank is not going to pay bonuses to its senior staff.
The banks, including NatWest, Santander and Barclays, have welcomed this decision. These banks had to pay billions to the shareholders. But recently, the banks are getting pressure for holding onto the money.
The decision is learnt from the previous recession. Sam Woods, the Deputy Governor of the Bank of England, has taken the initiative. He urged the higher authority to suspend the dividend payments.
He urged the authority to inform him within Tuesday evening. The Prudential Regulation authority stated that the shareholders will not be receiving dividends. The authority has also mentioned that they are making this decision just to stabilize the condition of the economy of the UK. The banks are going to help the economy suffering from economic disruption through this step.
According to the analytical reports from AJ Bell investment firm, some banks have to pay a total of £15.6 billion to their shareholders. These banks are Lloyds, Barclays, Standard Chartered, Royal Bank of Scotland. After the decision, all these banks are going to keep this huge amount of money rather than paying those shareholders.
The banks would not pay shareholders from the retaining fund at least for this year. This fund is going to help the economy of the country in case of any mishap. The Bank of England has stated that the fund would be helpful for banks for the remaining months of 2020. There are predictions that the year 2020 would be a tougher year due to the Coronavirus outbreak.
There are many experts who are assuming that the UK along the globe might enter a recession period. Well, the economy is seemingly moving towards it. An indicator regarding it has shown up last week. Economic activity has fallen to its lowest reading ever. There are predictions that the economy of the UK might contract to a level of 15%. That is too happening in the second quarter of this year.
Prudent and Right Step
Most of the bank authorities are thinking of retaining funds for future use rather than distributing it among the shareholders. The chief executive of the UK finance, Stephen Jones, has stated that banks were managing the way to scrap dividends before the Bank of England had instructed. He added that this step might sound strict but it is a necessary and prudent step for this period. All the banks should preserve capital for the current situation.
There are high chances that the banks might face high and long-term losses due to existing loans. The lenders should have that amount of money to lend on a loan. That’s why they need a big buffer in maintaining the deposits. All these processes would help the banks keep running in this situation, too.
If the banks manage to run smoothly then they can support the all-over economy of the UK. However, the Bank of England has not claimed the necessity of money or funding. Economists are assuming that there is enough money to handle the current economic situation of the country. Moreover, the banks are ready to deal with the upcoming consequences of the Coronavirus outbreak over the economy.
Before, when the last recession took place twelve years ago, banks got criticism from each and every platform. The cause was that the banks managed to pay dividends to their shareholders. Since that incident, banks are being forced to keep more and more capital so that more public money can be spent on that. Not all banks have got private. For example, the government acquires sixty-two per cent shares of the Royal Bank of Scotland.
As a consequence, the shareholders of different banks are going to be affected. In this case, Barclay stands first. The bank has to halt an amount of £1 billion or more for not paying the dividends among its shareholders. Nigel Higgins, the chairman of Barclays, has considered the decision as a difficult one.
He added that the bank consists of enough money for now. But still, it is a very prudent move to retain more and more capital for the future. The strong capital base of the banks would help to support the people and businesses in this tough situation. He also added that Barclay still stands strong enough to handle all the instances.
Now, let’s come to UK consumers. They would get up to £85,000 per bank if the bank collapses. In case, a bank has to collapse then the consumer would get £85,000 from the financial services umbrella. If there is a joint account then the compensation is up to £170,000.
Significance of this Decision
First of all, it might be shocking for all the shareholders of the banks. But, for the current scenario, it is a prudent move. If all the banks would refrain from paying dividends to their shareholders then the banks can retain more capital.
The decision would bring a strong impact on the lives of the shareholders. But, this is for the sake of the greater economy of the UK. The Prudential Regulation Authority has also stated that it is going to suspend the cash bonuses from the behalf of the commercial banks. But, this decision is not agreed, still now.
The logic behind this sensible and big step is to preserve capital in order to revive the economy of the UK. If the banking sectors are left with lesser capital then it might affect the financial circumstances of the country. Due to the Coronavirus crisis, businesses might lose their flow.
Then, the building societies and banks can help with those businesses by managing proper funding. The banks are getting pressure for cancelling the payments of the dividends to their shareholders but they have decided to stick to the decision.