COVID-19: Regulatory Impact Phase 2 (42) 3/11

From 16 March to 31 July, I wrote a series of daily blogs looking at Covid's initial impact on regulation. We are now moving into a new phase, most obviously as regulators try to unwind some of the temporary measures they have put in place, but also as they strive to move on. This new blog series will track their progress...

Following the big banks' generally positive Q3 results, the PRA/Bank faces a key decision in whether it should again prevent them paying dividends, as it did at the outset of the crisis. Beyond the debate around the specific issue, it raises wider questions about the proper role of regulation, the role of banks in the economy and the effectiveness of the post financial crisis reforms, that will need to be resolved once the crisis has passed. Taking these in turn...

One of the biggest dangers for a supervisor to avoid used to be the risk of acting as a "shadow director", in other words, actively second guessing a firm's management and Board. As late as 2008, after the collapse of Northern Rock, a generally very positive report on the FSA - part of the Hampton Review process of major UK regulators - cautioned against this tendency. Blocking dividends a second time would cross an important line - what other key decisions should the regulators take an advance view on?

Banks' share prices tanked after the original dividend decision and a repeat, on top of the speculation about the likely high default rate on bounce back loans, would further fuel the argument that they are increasingly being used as a public utility, and have, at least for the duration of the crisis, been partially co-opted to the public sector. This is arguably an issue already but a decision to delay further banks' dividend payments would deepen it.

In addition, of course, the PRA/Bank's original action raised several questions about the effectiveness of the reforms enacted since 2008. Although the PRA/Bank, including the FPC, has trumpeted the strength of banks' capital ratios coming into the crisis, they seem not to have been high enough to allow for dividend payments. If those ratios had been higher still, would it have made a difference? At the time, there was considerable market turmoil, the ECB had made a similar move, and the Systemic Risk Council had called for dividends to be suspended, so there was a context that doesn't appear to exist this time. And finally, as I inferred yesterday, a further decision by regulators to force banks to delay their dividends would highlight that the "too big to fail" agenda still has a way to go.

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