In a warning message sent out to all major British Banks like the Royal Bank of Scotland (RBS), HSBC and Barclays, the Bank of England has issued strict restrictions on year end bonus payouts. The banks should instead try to conserve cash, the bank Central Bank advised.
The Boards of Directors “should apply restraint in distribution of profits to equity holders and staff”, the regulator advised.
The strong disciplinary message comes at a time when City banks are preparing to dole out lavish bonuses that may top £7 billion.
The Central Bank also advised banks to conduct more rigorous stress tests since the previous test was widely criticized as not strong enough.
Pan-European stress tests are required to build confidence amongst all stake holders and need to be more stringent than the one conducted earlier this year, the bank observed.
Cautioning British banks against any complacency, it said because of “interconnectedness of European banking systems”, British banks will be vulnerable to the sovereign debt crisis being witnessed by Europe currently.
Explaining further, the bank said though British banks have very little exposure in the so-called ravaged ‘PIIGS’ economies – Portugal, Ireland, Italy, Greece and Spain, they hold sovereign debts worth £300 billions of Germany and France – which are heavily exposed to the ‘PIIGS’ countries.
Under the current capital adequacy rules, “there is a risk that banks have not set aside sufficient capital to absorb any losses’ on sovereign debts, it observed.
Stating that the crisis is still far from being over, it warned that both British and foreign home prices may slide further. This may bleed the British lenders further and force them to book losses, endangering the fragile economy further.
The Central Bank wants British lenders to be prudent and be prepared for further losses by making more provisions.