Britain's biggest banks to face tougher stress tests

Annual financial health assessment will focus only on seven biggest lenders and could require them to hold more capital in order to pass

The UK’s seven biggest lenders are to be subjected to more sophisticated assessment of their financial health by the Bank of England, in a move that could require them to hold more capital to withstand the tests based on shocks to the financial system.

Outlining its approach to stress testing for the next three years on Wednesday, the Bank said it would focus only on the seven biggest banks and building societies. This means it will not include smaller banks such as TSB or Virgin Money, or the UK arms of international investment banks or fund managers.

The big six banks – Barclays, HSBC, Lloyds Banking Group, Santander UK, Standard Chartered, Royal Bank of Scotland – and the biggest building society, Nationwide, will, in theory, need more capital to pass the tests as each will be set an individual hurdle rate. Until now, in the tests introduced since the 2008 banking crisis, the banks have been set the same threshold to pass the annual assessments. The pass rate is a capital ratio of 4.5%, even though the average for the six is 6.1%.

In addition to this individual pass rate, other changes are being introduced. The existing annual assessment, based on shocks to the economy, will be made harder during periods of economic stability. “The severity of this scenario will increase as risks build and decrease after those risks crystallise or abate … The stress test will lean against the cyclicality of the risk-taking: it will be countercyclical,” the Bank said.

A second assessment will be introduced every other year – a so-called exploratory factor – such as the ending of a currency peg such as the Swiss franc. In years when the Bank is not conducting this test, the UK banks will be subject to an assessment by the pan-European banking regulator, the European Banking Authority. The Bank did not set out what these exploratory factors would be, or if it would include a possible Brexit. The first year this exploratory test will take place is 2017 and it may not cover all seven of the lenders.

Mark Carney, governor of the Bank of England, said: “The United Kingdom needs banks that can weather shocks without cutting lending to the real economy. Our first concurrent stress tests run in 2014, centred on the housing market, gave us assurance that the banking sector as a whole was well-placed to withstand such as severe scenario. We have also recognised the need for our approach to evolve.

“The Bank of England is taking steps to ensure we can assess a range of future risks from a number of different sources to inform our micro- and macro-prudential policy decisions. Our approach embodies a comprehensive and detailed approach, a desire to deepen and strengthen our analysis, and the flexibility to respond to changing risks.”

The same seven lenders are undergoing stress tests to be released on 1 December. These tests are based on shocks to the global economy in a move expected to put the most pressure on the emerging markets focused banks HSBC and Standard Chartered.

The Bank warned the wider financial services sector that it too could eventually be subjected to stress tests. “The Bank believes there is merit in seeking to develop tools for stress testing the UK financial system as a whole, going beyond the core banking sector,” the Bank said. But, it said, there needed to be more research on the linkages between financial firms before this could happen.


Jill Treanor

The GuardianTramp

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