Stress tests put banks on the spot

LEADING lenders are bracing themselves for the results of tough stress tests by the Bank of England showing how badly they would fare in a sharp downturn.

Banks will have to say how much capital they would lose if unemployment soared to 9.5 per cent and house prices fell by a third.

Analysts said a looming fine for RBS from the US Department of Justice for crisis-era, sub-prime lending could mean it fails the test, which is based on balance sheets at the end of 2016.

However, they added that RBS has generated more capital this year so should not need to raise any extra funds.

The stress test results will come in the same week as the Bank’s Financial Stability Report, which will give an overview of the vulnerability of the whole system.

The Bank is also about to release figures for all lenders that are expected to show a decline in mortgage approvals.

Some economists believe this could signal that the market is on the verge of a major downturn.

Figures last week for the high street banks from the UK Finance trade association have already indicated a dip.

Mortgage approvals are set to fall to 65,000 from 66,100 last month, according to consultancy Capital Economics. The recent rise in interest rates is likely to have dampened demand further since the period covered by the figures.

And mortgage rates are likely to rise further when the Bank of England’s term funding scheme, a form of cheap finance for banks, comes to an end in the New Year.

Samuel Tombs, UK economist at Pantheon Macroeconomics, said: ‘This appears to be just the start of a bigger downturn.’