Large British banks have decided not to pay shareholders nearly £8bn worth of dividends, and to cancel cash bonuses, in order to use the money to support lending in the economy.

The banks will use capital where it is needed most—to fund cashflow, overdrafts, and credit lines to clients—as the worldwide pandemic continues to wreak havoc on businesses and consumers across the economy.

The move, which some banks had been considering, got a boost from a letter by Sam Woods, deputy governor of the Bank of England. The message asked bank bosses to suspend all dividend payments to investors and cancel cash bonus payments to executives.

“To support to economy through 2020”

In response, Britain’s largest lenders—including Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered—said they would temporarily halt shareholder payouts and share buybacks.

The cancellation of dividends will leave banks with a financial cushion worth nearly £8bn which they will use “to support the economy through 2020”.

The central bank acknowledged that investors, especially those living off their dividend income, will feel the effect of the dividend suspension.

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By GlobalData

“Although the decisions taken today will result in shareholders not receiving dividends, they are a sensible precautionary step given the unique role that banks need to play in supporting the wider economy through a period of economic disruption,” said the Prudential Regulation Authority, which is part of the Bank of England.

The decisions will be felt most immediately by Barclays’ shareholders who were set to receive more than £1bn today.

“Scrap any unpaid bonuses”

Most UK banking bosses have already received their cash bonuses for 2019, but the decision to halt bonuses is expected to cut into chief executive pay for 2020.

In a letter to chief executives, the head of the Bank’s Prudential Regulation Authority – which is in charge of financial stability – said any bonuses [for 2019] that have not yet been paid out should be scrapped.

The Bank of England also fired a warning shot at insurers, saying they should think carefully before paying dividends or bonuses to senior staff:

“We expect them to pay close attention to the need to protect policyholders and maintain safety and soundness, and in so doing to ensure that their firm can play its full part in supporting the real economy throughout the economic disruption arising from Covid-19.”