The Bank of England (BoE) announced the results of its stress test, revealing that three UK lenders, the Co-operative Bank, HSBC Bank, and RBS need to strengthen their capital position.
HSBC was the only one of three banks included in the FTSE100 deemed to be “at risk” in the crisis scenario, while Barclays and Lloyds shares added 1.4% and 1.7% respectively following the publication of the results.
The stress test conducted by the ECB covered eight British banks and building societies, testing their resilience to a severe housing market shock and a sharp rise or snap back of interest rates.
Lenders included in the research were Barclays Bank, Co-operative Bank, HSBC Bank, Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland, Santander UK and Standard Chartered.
Mark Carney, governor of the BoE commented: “This was a demanding test. The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited.”
The BoE applied a threshold CET 1 ratio of 4.5%, which is somewhat below the more stringent ratio CET1 of 5.5% the ECB used in its recent asset quality review. If the latest ECB threshold had been applied, the Co-operative Bank, Lloyds Banking Group and RBS would have failed the test.
John Thanassoulis, Professor of Financial Economics at Warwick Business School comments on the results of the stress test “The Bank of England are being diligent and fair to all the banks, but the downsides of this approach to financial regulation are that we publicly name certain banks as being distressed sellers of assets. For example the Co-operative bank has now been required to sell a large part of its mortgage book. A forced seller is one who will not receive a good price.
“The second downside is that the reputational damage of doing things of which the Bank of England does not approve will make banks risk averse. Whether this is bad is a question of degree. But if lending costs rise for individuals and businesses in the medium term then the poorest consumers and the small entrepreneurs will be the ones who suffer first.
The BoE Financial Policy Committee concluded that “the resilience of the system had improved significantly since the capital shortfall exercise in 2013“, consequently, “no system-wide, macroprudential actions were needed in response to the stress test.”