British banks can breathe a sigh of relief after the publication of the Bank’s stress tests results yesterday (28 November), having proven they can continue lending to the public even in the event of a major global downturn.
In the Financial Stability Report, the Financial Policy Committee (FPC) headed up by Governor Mark Carney, said: “The UK economic scenario in the 2018 stress test of major UK banks was sufficiently severe to encompass the economic shock in the disorderly Brexit scenario.
“Based on this, the FPC judges that the UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit.”
The latest results mark the second time all seven of the UK’s largest lenders have passed the tests, which were originally initiated by the BoE following the 2008 financial crisis.
“The test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis and that are combined with large falls in asset prices and a separate stress of misconduct costs,” the FPC wrote in the report.
Building society Nationwide came out as the strongest performer in this year’s tests. Under the scenario, its common equity tier 1 (CET1) capital ratio (a key measure of balance sheet strength) fell from 30.4% to 14.1%, which is well above the required 7.9%.
Santander UK and RBS also did well in the tests, with the latter having lagged peers in the previous year, while HSBC and Standard Chartered also sailed through.
Lloyds came at the bottom of the list, since its “largely UK-centric business model meant it faced increases in impairments and RWAs as a result of the UK macroeconomic stress, driven by higher interest rates, unemployment and house price falls”.
Overall, the report concluded that “no bank was required to take action to improve its capital position as a result of the stress test”.
This year’s models included scenarios such as a sharp economic downturn, a strong rise in defaults by UK customers and large interest rate increases.
The scenarios were based on a 4.7% fall in UK GDP and a 2.4% globally, a fall in UK residential property prices by a third and a BoE base rate of 4%. This would force the seven major banks to absorb £170bn in lending and trading losses and net losses of £70bn, according to the BoE.