PRA pitches greater MDA freedom for UK banks
The Bank of England has proposed an easing of the rules on maximum distributable amounts for UK banks, aiming to increase the usability of their capital buffers in times of need.
The proposals from the Prudential Regulation Authority are the first solution put forth in Europe to what has become a commonly cited issue in recent months.
After the coronavirus pandemic erupted in March, banks in the UK, the eurozone and the US were quickly given a green light to use their capital buffers in order to keep lending to businesses and households.
However, regulators and bankers have noted banks appear reluctant to dip into the buffers out of fear of how investors may react if they trigger automatic restrictions on Additional Tier 1 coupons and other distributions.
The message was again hammered home by Pablo Hernandez de Cos, chairman of the Basel Committee on Banking Supervision, speaking at the virtually held International Conference of Banking Supervisors on Monday.
"Since the start of this crisis, the committee has publicly reiterated its position that a measured drawdown of buffers to meet these objectives is appropriate, and that supervisors will provide sufficient time for banks to restore these buffers," he said.
"Using these resources to absorb shocks and support households and businesses should take priority at present over discretionary distributions."
Some regulators and market participants have suggested a rethink is needed so buffers can be a better tool during times of stress.
In a consultation paper on its transposition of the Capital Requirements Directive V - which the UK must transpose by December 28 - the PRA has diverged from Europe in an attempt to offer a solution.
The paper proposes changes to be made after the end of the transition period - after which the UK can break from the rules set in Brussels - intended to increase the usability of banks' combined buffers.
NEW FLEXIBILITY
First, the PRA proposes the removal of a restriction carried over from CRD IV into CRD V that prevents banks from making distributions that would cause their CET1 levels to fall into the combined buffer.
The PRA said this restriction increases the incentives for firms to hold higher excessive management buffers.
To support this new discretion, the PRA also proposes that firms should provide the PRA with advance notice of any distribution which would bring their capital levels into the combined buffer.
It said this approach is consistent with the requirements of the BCBS.
The PRA is also proposing to amend the definition of the MDA. CRD V defines the MDA as interim and year-end profits net of distributions and does not permit profits already counted towards CET1 resources to be distributed.
The PRA says this definition means firms that recognise profit as CET1 capital more frequently will have a smaller MDA and reduces the extent to which the combined buffer may be used in practice.
Instead, it proposes the MDA be redefined as the sum of all earnings over the last four calendar quarters net any distributions, including certain profits already recognised as CET1.
Bankers said both proposals would be positive for banks, increasing their flexibility.
"Everyone recognises there is a problem, so it is positive that the UK has proposed a solution," said one.
TOO EARLY?
In its latest macroprudential bulletin on Monday, the ECB also acknowledged banks' reluctance to breach their buffers, and said pressure from financial markets can explain this behaviour.
"Adverse and uncertain periods are characterised by low risk appetite and flight to safety among investors in bank debt and equity," they said.
"Hence, banks may refrain from using their capital buffers in order to avoid potential increases in credit risk premia embedded in their funding costs."
Despite supportive comments from regulators, the paper said banks also appear concerned about their ability to replenish capital while much of the sector faces structurally weak profitability and limited organic capital generation.
Lower-rated banks in particular may be concerned about losing access to wholesale funding markets if they let their buffers shrink, it added.
However, the paper added it may be too early to draw conclusions on banks' willingness to use their buffers because losses have been prevented or delayed and lending has been supported by other policy measures beyond prudential policies.
So far, they said, these policies have alleviated the need to reduce capital targets, while still being able to accommodate loan demand.