UK banks pass stress test

BoE says top len­ders can with­stand dis­or­derly Brexit

The Star Malaysia - StarBiz - - Foreign News -

LON­DON: The Bank of Eng­land (BoE) said the UK’s big­gest len­ders emerged from its lat­est stress test with the strength to keep lend­ing even dur­ing a “dis­or­derly” Brexit.

Five of the seven banks passed the health check, while two – Bar­clays Plc and Royal Bank of Scot­land Group Plc – fell be­low their sys­temic ref­er­ence point, a higher thresh­old that re­flects their global sig­nif­i­cance. Yet ac­tions taken by the banks since end-2016 mean nei­ther needs to bol­ster their cap­i­tal, the BoE said yes­ter­day.

While the test didn’t factor in eco­nomic shocks specif­i­cally re­lated to the with­drawal from the Euro­pean Union, it pit­ted banks against a 4.7% plunge in UK out­put, the pound crash­ing 27% ver­sus the dol­lar, house prices de­valu­ing by a third and £40bil of mis­con­duct charges.

“The stress-test sce­nario there- fore en­com­passes a wide range of UK macroe­co­nomic risks that could be associated with Brexit,” the BoE said. As a re­sult, it “judges the UK bank­ing sys­tem could con­tinue to sup­port the real econ­omy through a dis­or­derly Brexit”.

A messy di­vorce – with no trade deal or tran­si­tion agree­ment – cou­pled with a “se­vere global re­ces­sion and stressed mis­con­duct costs” could push banks be­yond the lim­its of the stress test, forc­ing them to draw down cap­i­tal buf­fers sub­stan­tially more. In this case, firms would be more likely to re­duce lend­ing, the BoE said.

The BOE also fol­lowed through on its plan to in­crease the coun­ter­cycli­cal cap­i­tal buf­fer to 1%. In June, the reg­u­la­tor said this buf­fer level would in­crease re­quired sys­tem-wide cap­i­tal by £11.4bil “given cur­rent risk-weighted as­sets.”

The in­crease be­comes bind­ing in a year. It won’t force banks to strengthen cap­i­tal, but it will re­quire them “to in­cor­po­rate some of the cap­i­tal they cur­rently have in ex­cess of their reg­u­la­tory re­quire­ments into their reg­u­la­tory cap­i­tal buf­fers.”

The cen­tral bank’s Fi­nan­cial Pol­icy Com­mit­tee will con­sider the ad­e­quacy of the buf­fer rate dur­ing the first half of 2018 and could raise the level again.

HSBC Hold­ings Plc, Lloyds Bank­ing Group Plc, Na­tion­wide Build­ing So­ci­ety, San­tander UK Plc and Stan­dard Char­tered Plc all passed the health check, which was based on end-2016 data.The seven len­ders in­cur losses of about £50bil in the stress sce­nario, a level that “would have wiped out” their com­mon equity cap­i­tal a decade ago. All banks stop pay­ing div­i­dends, bonuses and ad­di­tional Tier 1 debt coupons un­der the sce­nario.

Bar­clays fell be­low its sys­temic ref­er­ence points for com­mon equity Tier-1 cap­i­tal and Tier-1 lever­age ra­tio, the BoE said. It wasn’t re­quired to sub­mit a new cap­i­tal plan thanks to steps taken since De­cem­ber, in­clud­ing is­su­ing £2.5bil of AT1 debt and sell­ing down its ma­jor­ity share­hold­ing in Bar­clays Africa Group Ltd.

RBS missed its CET1 ra­tio sys­temic ref­er­ence point, but like Bar­clays wasn’t re­quired to sub­mit a new cap­i­tal plan.

Be­fore the test re­sults were an­nounced, Gold­man Sachs Group Inc an­a­lysts led by Martin Leit­geb said the fo­cus would be on Bar­clays, Lloyds and Stan­dard Char­tered be­cause they are all try­ing to in­crease or restart div­i­dend pay­ments.

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