Fitter for the jitters
Bank of England decides to re-run its ‘doomsday’ stress test
THE Bank of England has decided to re-run its “doomsday” set of stress tests to determine how lenders would cope in a deep crash – but set higher hurdles for the biggest banks to clear.
The annual test for UK banks sets a tough economic scenario to see whether lenders have enough capital to survive.
This year’s test is a repeat of last year’s, but with a twist, as a tougher pass hurdle has been set for the largest lenders judged to be “systemically important”.
This could potentially put more pressure on RBS and Barclays, which both failed to pass the higher systemic hurdles set for them last year, although they passed the standard mandatory stress tests. Both have pushed up their capital buffers since last year’s tests were set.
As in 2017, lenders will have to cope with a scenario the Bank devised to model a shock worse than the 2008 financial crisis. It includes a 4.7pc drop in UK GDP, interest rates rising to 4pc and a drop of a third in UK house prices.
However this year larger lenders will be held to higher standards, particularly those focused on the UK, like RBS and Lloyds. The tests will also incorporate new global accounting standards – known as IFRS 9 – for the first time, which require banks to recognise losses on their books earlier.
This should mean banks recognising deeper losses earlier in a crash, potentially adding pressure sooner in a downturn. Theoretically it would not increase the total amount of losses over an economic cycle. The Bank of England said it was setting the same test as last year partly to ensure lenders had sufficient spare resources to respond to Brexit and to restructure and ringfence their UK banks to comply with new rules.
Last year no lender failed the Bank’s mandatory stress tests and none were required to raise additional capital.
Separately, the Treasury announced that a further 45 City firms had signed up to its Women in Finance charter, which commits firms to improving gender equality, including in senior roles. A total of 205 firms have joined.
Goldman Sachs and Metro Bank were among the new signatories – but JP Morgan was notably absent. The lack of gender equality in the City has come into sharp focus in recent weeks, as banks publish their gender pay gaps.
Goldman Sachs yesterday disclosed its average gender pay gap is 56pc, rising to 72pc for bonuses. One insider called the numbers a “disgrace” and said more needed to be done.
Ahead of publication, the firm’s top executives Lloyd Blankfein and David Solomon emailed staff admitting there was still “significant progress to be made” on gender diversity and that they hoped to see half of Goldman’s workforce staffed by women at some point in the future.
On Thursday, HSBC said women working for it in the UK are paid 60pc less on average than men, one of the largest gaps disclosed by a bank so far.
Commenting on the latest round of signatories to the charter, Theresa May, the Prime Minister, said: “This is an important step forward … because our workplaces are greatly enriched by different approaches.”