Bank of England takes off the shackles from lenders
THE Bank of England made one of its most significant interventions to help banks cope with the coronavirus crisis today, cancelling so-called stress tests on the major lenders.
That move is intended to help banks support employers and the wider economy without having to worry that they will fall foul of the regulators.
The tests measure whether the top eight banks, and Nationwide building society, would survive a major economic crash. The banks passed the last exam in December, with another due in late March.
There has been pressure from the banking sector to bin the next stress tests given the severity of the unfolding health emergency and the need to back businesses.
The move to ditch the tests suggests that, technically, some lenders would presently fail if a snapshot were taken of the current situation.
The Bank, led by Andrew Bailey since he replaced Mark Carney on Monday, said: “The decision to cancel the 2020 stress test for the eight major UK banks and building societies is intended to help lenders focus on meeting the needs of UK households and businesses via the continuing provision of credit.”
Bank shares rose in a wider market recovery with, challenger banks rallying hard. Virgin Money shot up 25% to 73p. Metro Bank gained 5% to 87p. Bigger banks also jumped. Barclays was up 3% to 87p. The City watchdog had already cut banks’ so-called countercyclical buffer rate to 0%.
In theory, the banks are supposed to hold on to extra capital during times of stress. This crisis is judged to be so bad that the Bank is in effect telling the lenders to give out as much cash and debt as possible without worrying about their balance sheets.
The Bank of England’s statement said: “The financial policy committee and the prudential regulation committee expect that all elements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy through this temporary shock.”
It added: “The recent 2019 stress test showed that the UK banking system was resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs.”
The BoE also said it was delaying other regulatory reports on bank liquidity and climate risk, and a study into openended investment funds.
A new regulation forcing banks to report losses on bad loans far more quickly has also been suspended.
Yesterday, the BoE made its second cut in interest rates in just over a week, bringing them down to 0.1% from 0.25%.
Interest rates are now at their lowest in the Bank’s 325-year history.
The lenders due to be tested were Barclays, HSBC, Lloyds, Nationwide building society, Royal Bank of Scotland, Santander, Standard Chartered and Virgin Money.