Ring-fenced banks could face impact on dividend pay-out due to increased capital pressures, says KPMG

Ring-fenced banks could face impact on dividend pay-out

Basel IV and future stress test criteria could put significant pressure on ring-fenced banks’ ability to pay dividends.

Also on KPMG.com

  • Banks’ capital decisions in response to ring-fencing today, will have a significant long-term impact

Commenting in response to the Prudential Regulation Authority’s (PRA)publication of the bank ring-fencing consultation, Steven Hall, banking partner at KPMG said:

“Today’s publication will provide some comfort to the banks, especially given the costs of ring-fencing will be in the millions, as opposed to the billions that some had originally feared. 

“Attention must now turn to how future capital requirements may impact dividend payments and operations. 

“Upcoming regulations including Basel IV, could put significant pressure on ring-fenced banks, ultimately impacting their ability to pay dividends. In other words, banks who divide their capital between ring-fenced banks to meet the dividend requirement, could find that they may not be able to in a few years’ time. 

“There is a further question on the extent of capital each ring-fenced entity and the holding group will need. All eyes will be on the Financial Policy Committee to provide clarity.” 

Rob Smith, banking director at KPMG, added, “Ring-fenced banks will face a pincer movement from both the dividend pre-approval process and from the annual stress tests.  

“As ring-fenced entities will lose subsidy and reasonable diversification benefits, this can expose weaker areas within the banks during a stress test. Banks could be compelled to find more capital in order to pass.

“It is not yet clear given the size of non-ring-fenced and ring-fenced entities, whether they will fall under the scope of future stress tests, or if all ring-fenced entities will be considered as one. But it will be interesting to see how future stress tests are designed to accommodate the new regime. 

“Capital decisions banks make in response to ring-fencing will have a profound long-term impact.” 




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