Barclays, Lloyds laggards of EU bank stress test
Britain’s Barclays and Lloyds were the surprise laggards in a EU bank health check by the European Banking Authority (EBA), whose results were published on Friday, though none of the 48 lenders tested failed a major capital threshold.
The EU’s banking watchdog published results for its toughest “stress test” since 2009, when it began the exercise to identify capital holes and avoid any repeat of the government bailouts triggered by the 2008 financial crisis.
The latest test measured banks’ ability to withstand theoretical market shocks such as a rise in political uncertainty against a backdrop of plunging economic growth, a disorderly Brexit or a sell-off in government bonds and property.
While there was no pass or fail, banks unable to complete the “adverse” or toughest part of the test without preserving a capital ratio of well above 5.5% could be forced by regulators to raise more capital, sell risky assets or curb their dividends. None of the banks dropped below the 5.5% threshold,
Barclays ended up with a core capital ratio of 6.37% and Lloyds with 6.8% in the adverse scenario, both marked down due to their exposure to riskier credit, the EBA said.
British banks have chased higher-risk business to try and boost returns, as rock-bottom interest rates and competition from upstart rivals fuelled a boom in consumer lending. This has prompted repeated warnings from the Bank of England for them to be more prudent
The IMF said in September that consumer credit in Britain was rising much faster than income and this could require “additional increases in bank-specific-- capital buffers”.
But Britain’s central bank, which will publish the results of its own stress tests of British banks on December 5, said on Friday the UK lenders tested by EBA showed they could absorb the effects of the worst scenario. The EBA test contained potential shocks such as Britain crashing out of the EU in March 2019 without a deal.
Barclays said in response to the results it remained comfortable with a target core capital ratio of about 13%. Lloyds said its capital levels remained strong and still expected to generate two percentage points of additional capital for the full year.
Some Italian banks also fared poorly. Banco BPM’s capital result was 6.67%, while UBI’s was 7.46%. Monte dei Paschi di Siena, which failed the previous round of stress tests in 2016 and has since been bailed out by the state, was not included in the health check this time. Italian banks had been expected to be among the worst performers due to a sharp fall in the value of government bonds since an anti-establishment, Eurosceptic government came to power in June. The country’s banks hold some $427bn of domestic government bonds, and the rise in Italy’s bond yields is eating into their capital and pushing their borrowing costs higher.
Germany’s largest lender, Deutsche Bank, had a ratio of 8.1%, the second-worst German score ahead of public-sector bank NordLB, but up from 7.8% when it was last put under the microscope two years ago.
The outcome of the tests showed there was, on average, enough capital in the EU banking system, but challenges such as bad loans and lacklustre earnings remain, said Mario Quagliariello, the EBA’s director of economic analysis.
“Profitability remains quite a problem for many banks in Europe,” he said. Risks from credit was common across the EU. The EBA said across the 48 banks tested, the adverse scenario dented the core equity capital ratio by 395 basis points when all new and planned capital rules were applied.