Vulnerable UK banks still paying billions in dividends to shareholders

If cash had been retained by banks their capital buffers would have been boosted, say researchers

Barclays has paid out around £6.3bn in cash to shareholders since the last financial crisis (Getty)

Three of the UK’s biggest banks have paid out billions of pounds in dividends to investors while turning a blind eye to huge capital holes in their balance sheets, researchers argue.

The findings, which come in the wake of estimates the UK banking sector has an aggregate £155bn shortfall of capital, will reinforce calls for the Bank of England to take a tougher stance on the capital adequacy of the lenders it oversees and to restrict the payment of dividends.

Between 2010 and 2015 HSBC paid out £37bn in dividends, Barclays paid out £6.3bn and Lloyds paid out £2.3bn according to the calculations of Sascha Steffen of the University of Mannheim, Viral Acharya of New York University and Diane Pierret of the University of Lausanne. If this cash had been retained by the banks it could have boosted their capital buffers by an equivalent amount.

The three researchers last month produced an estimate that suggested UK banks would be massively exposed and at high risk of going bust in another serious financial crisis.

UK banks are in better shape, but not in good shape. 

&#13; <p>Sascha Steffen, University of Mannheim</p>&#13;

They found that the majority state-owned Royal Bank of Scotland, Lloyds, Barclays and HSBC could collectively need to raise another £155bn of capital to maintain a comfortable equity safety buffer in the wake of a fresh crisis based on the market value of their equity.

Speaking to The Independent, Professor Steffen said the UK’s big banks are in a stronger position than banks in continental Europe, thanks to the fact that they were aggressively recapitalised with public funds in the 2008-09 crisis, while this painful medicine and restructuring was often ducked in mainland Europe.

But Prof Steffen also said that there was still a strong case for UK regulators to impose restrictions on dividend distributions to force British banks to build up their capital buffers further.

“UK banks are in better shape, but not in good shape. They should stop paying dividends” he said.

He also said that UK regulators should prevent banks from using surplus cash to “buyback” shares, a practice favoured by managements as it tends to boost their stock prices.

Last week HSBC announced $2.5bn (£1.9bn) of share buybacks following the sale of its Brazilian business.

The three researchers used the Federal Reserve’s stress test method to quantify the capital shortfall of UK banks. This found a shortfall of €5.2bn (£4bn) at RBS and €7.3bn at Barclays. Barclays has paid out roughly this amount in dividends to shareholders since 2010.

RBS has not paid a dividend since the financial crisis when it had to be bailed out with £45bn of taxpayers’ funds. However, in March RBS’s management chose to pay £1.2bn to redeem the Government’s “Divided Access Share”, in order to enable the bank to restart dividend payments at some point.

The researchers found the 10 poorest performers in the European Banking Authority’s recent stress tests exercise had paid out a cumulative €20bn of dividends since 2010 and that all 34 of the listed bank in the test had distributed €170bn over the past five years.

They said that the banks pay out, on average, more than 60 per cent of their earnings in cash to shareholders.

“Allowing under-capitalised banks to pay out dividends represents a substantial wealth transfer from subordinated bondholders to shareholders as it increases the likelihood that bondholders will need to be bailed in,” they wrote.

“Moreover, it is ultimately a wealth transfer from the taxpayer to the shareholders as state aid is possible under the new restructuring rules after 8 per cent of equity and liabilities have been bailed in.”

Capital represents the shareholders’ funds on a bank’s balance sheet that are eaten up as a lender registers losses. If the capital is too small to absorb losses the bank is bust and its debt holders are forced to accept losses.

In the 2008-09 crisis banks went bust but had to be rescued by taxpayers since they were deemed to be systemically important, prompting a post-crisis drive for them to be compelled to maintain significantly larger equity cushions.

The Bank of England says UK banks are adequately capitalised, having run its own series of stress tests on the sector in recent years. But some independent analysts have criticised these stress test as flawed, saying the exaggerate the strength of UK lenders in the face of a looming new financial crisis.