The Bank of England has published the results of the first concurrent stress testing exercise of the UK banking system.
Alongside the stress test publication, the Bank of England also published its Financial Stability Report, which sets out the Financial Policy Committee’s (FPC) assessment of the outlook for the stability and resilience of the financial sector, and the Systemic Risk Survey, which quantifies and tracks market participants’ perceptions of systemic risks.
Following on from the EU-wide stress test, the 2014 UK stress test of the eight major UK banks and building societies was designed specifically to assess their resilience to a very severe housing market shock and to a sharp rise or snap back in interest rates.
It was stressed that this was not a forecast or expectation by the Bank of England regarding the likelihood of a set of events materialising, but a coherent, severe ‘tail risk’ scenario.
The eight banks and building societies tested as part of this exercise were Barclays Bank, Co-operative Bank, HSBC Bank, Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland, Santander UK and Standard Chartered.
There was substantial variation across the banks and building societies in terms of the impact of the stress scenario. From an individual-institution perspective, the Prudential Regulation Authority (PRA) Board judged that this stress test did not reveal capital inadequacies for five out of the eight participating banks, given their balance sheets at end-2013 (Barclays, HSBC, Nationwide, Santander UK and Standard Chartered). The PRA Board did not require these banks to submit revised capital plans.
Following the stress testing exercise, the PRA Board judged that, as at end-2013, three of the eight participating banks (Co-operative Bank, Lloyds Banking Group and Royal Bank of Scotland) needed to strengthen their capital position further. But, given continuing improvements to banks’ resilience over the course of 2014 and concrete plans to build capital further going forward, only one of these banks – Co-operative Bank – was required to submit a revised capital plan.
It is anticipated that the Co-op will need to sell assets to improve its capital position.
Lloyds Banking Group chief executive, António Horta-Osório, said: “We are pleased to have exceeded the PRA stress test threshold under a severe UK-focused assessment. These results are a clear demonstration of the progress the Group has made over the first two full years of our strategic plan, which was announced in June 2011.
“The stress test was based on our balance sheet as at the end of 2013 and since then we have made further significant progress in strengthening our capital position and delivering on our strategy.”