Britain's biggest lenders await Bank of England's verdict on health checks

Bank’s stress test results will determine whether seven institutions should be forced to hold capital in order to rein in risky lending

Britain’s biggest lenders are braced for a decision by the Bank of England on whether they are strong enough to withstand turmoil in global markets, as Threadneedle Street considers restrictions on their activities to slow down the growth in consumer lending.

The results of the annual health check on six banks – Barclays, HSBC, Santander UK, Standard Chartered, Lloyds Banking Group and Royal Bank of Scotland – and Nationwide building society are released on Tuesday and will determine whether the institutions need to tap investors for cash or take other steps to bolster their financial strength.

They are being announced alongside the Bank’s twice-yearly assessment of risks to the financial system, in which it will give a verdict on whether lenders should be forced to hold capital in order to rein in risky lending.

Speculation that the Bank could impose more stringent capital rules on banks was sparked by remarks last week by Andy Haldane, the Bank’s chief economist, that consumer credit, and personal loans in particular, had been “picking up at a rate of knots”. His view that the Bank might want to look “fairly carefully” at this area had led to expectations that the Financial Policy Committee (FPC), set up to look for bubbles in financial markets, might use new powers to demand banks hold more capital against riskier lending operations.

The big seven lenders have been subjected to tests of their ability to withstand a dramatic slowdown in China and a contraction in the eurozone. The scenarios are regarded as a challenge to international banks HSBC and Standard Chartered, although the UK scenario includes inflation being negative for seven consecutive quarters and the interest rate being cut to zero from its current level of 0.5%.

In last year’s stress tests, the bailed-out banks Lloyds and RBS hovered above the pass rate while Co-operative Bank failed. Co-op is not being tested this year because it has scaled back its operations dramatically after a series of scandals.

Analysts at the investment bank Citi noted that banks had already started to take steps to bolster their capital, citing RBS and Standard Chartered, which earlier this month said it would raise £3.3bn and cut 15,000 jobs.

But, they said there would also be some focus on another measure of financial strength – known as the leverage ratio. Data published last week showed that Barclays has the lowest leverage ratio – and therefore has the weakest position – of the major UK banks.

Analysts at Berenberg concurred that banks would not fall below the pass rate set by the Bank. But they said there was a “strong signal” that the Bank may use its powers to require banks to build up more capital, through so-called countercyclical buffers, which require banks to build up more capital during a more benign economic environment.

This additional capital would be held across all loans, though the FPC also has powers to demand capital is held more specifically across three broad sectors [pdf]: residential property and mortgages; commercial property; and other parts of the financial sector. The Bank has had these powers since last year but has yet to use them.

Joseph Dickerson, an analyst at the stockbroker Jefferies, said: “If the purpose of employing a countercyclical buffer is to push back on the financial cycle, we would argue that the loan market in the UK is far from a cyclical peak. Thus, gross mortgage originations are annualising 41% below their 2007 peak.”

But analysts at Berenberg bank said the Bank might act: “The strength of recent communications [from the Bank] suggests to us that sector-wide capital actions may be imminent, most likely alongside the stress test results on 1 December.”


Jill Treanor

The GuardianTramp

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