Five major UK banks pass BoE stress tests
02 Dec 2015
Seven British banking majors have passed the stress tests conducted by the country's financial policy committee (FPC), suggesting that the banking system is sufficiently capitalised to support the economy in the event of a severe global stress scenario, the Bank of England (BoE) said in a report yesterday.
Five banks, including Barclays, HSBC, Lloyds Banking Group, Nationwide Building Society and Santander UK, have comfortably passed the test.
The Royal Bank of Scotland (RBS) and the Standard Chartered, which have not met the capital adequacy and leverage ratio criteria, were given leeway based on the steps taken by them to strengthen their capital positions.
RBS and Standard Chartered stated separately that they have passed the test due to recent strategic management actions taken to strengthen the bank.
The 2015 stress test, the second such major test of the British banking system, was carried out based on the lenders' balance sheets at end-2014. The evaluation of the lenders had commenced in March.
The stress tests are designed to check banks' resilience to a range of adverse shocks and assess their capital adequacy and ability to support the real economy if stress materialises.
The severity of impact of the stress is measured by comparing the stress projection with estimated capital adequacy of banks in the baseline scenario.
The aggregate common equity tier 1 ratio of the banks is expected to rise from 11.2 per cent in 2014 to 12 per cent in 2016, which is considered as the baseline, while the projected low point of stress is 7.6 per cent. The 4.4-percentage point difference represents the potential impact of stress in 2016.
The central bank said that UK's financial system has moved out of the ''post-crisis period'' but was not showing enough signs of overheating to require action to rein in credit.
The FPC said it ''intends to make active use of the time-varying countercyclical capital buffer,'' which means that bank must build up in good times to ensure they can operate their core banking functions in the event of a financial crisis.
The BoE governor Mark Carney hinted that the action would allow keeping the record low-interest rate for longer.
''There is no Basel IV,'' said Mark Carney, BoE governor, referring to concerns over a new tighter banking norms. ''Our objective has never been to raise capital without limit or raise it by stealth.''
Further to the stress test results, banking stocks surged with Barclays posting the maximum gain of 4.7 per cent yesterday in London, followed by RBS 3.3 per cent, Lloyds 2.7 per cent and HSBC 2 per cent.