Barclays, Lloyds shock in EU’s bank stress test
london — Britain’s Barclays and Lloyds were the surprise laggards in a European Union bank health check on Friday, although none of the 48 lenders tested failed a major capital threshold.
The EU’s banking watchdog published results on Friday 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 like 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 per cent, could be forced by regulators to raise more capital, sell risky assets or curb their dividends.
None of the banks tested in the health check by the European Banking Authority dropped below the 5.5 per cent threshold, but Barclays and Lloyds unexpectedly came in among the three worst performers.
Barclays ended up with a core capital ratio of 6.37 per cent and Lloyds with 6.8 per cent 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 take a more prudent approach. The International monetary Fund 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”. —