All major British banks pass Bank of England stress tests

MADRID, 12 Jul.

All major British banks pass Bank of England stress tests


The eight main banks in the United Kingdom have passed the stress tests to which they have been subjected by the Bank of England, which considers that all entities have proven to be resistant to a severe stress scenario, so no entity should strengthen its equity position.

The test results indicate that no individual or group-level bank would fall below its CET1 or Tier 1 leverage ratio on a transitional basis under IFRS 9 after taking strategic management measures, the bank announced, adding that "no bank is required to strengthen its capital position as a result of the test."

"This indicates that the major UK banks would be able to withstand the severe macroeconomic stress in this scenario, while also having the ability to support UK households and businesses during the stress," it added.

The test to which the Bank of England has submitted NatWest, HSBC, Barclays, Standard Chartered, Lloyds, Santander, Nationwide and Virgin Money contemplated an even more severe scenario than that registered during the 2008 global financial crisis, as highlighted by the institution.

The stress test results indicate that, in the scenario, all participating banks and building societies are held above their Common Leverage Ratio Tier 1 (CET1) minimum rates of return and no banks are required to strengthen its capital position as a result of the review.

In fact, the institution has highlighted that the aggregate capital reduction is less than in the 2019 stress test, despite the fact that the general seriousness of the proposed scenario is quite similar.

Overall, banks' capital ratios remain well above the minimum aggregate CET1 critical rate in a stress scenario, going from an initial aggregate CET1 ratio of 14.2% to a low of 10.8% in the first year of the stress situation, compared to a global critical situation rate of 6.9%.

Likewise, the aggregate leverage ratio falls from an initial point of 5.3% to a low point of 4.7% against a critical rate of 3.5%.

"At the point where banks' CET1 ratios are lowest, the eight banks' CET1 ratios are collectively more than double the level prior to the 2007-08 global financial crisis," the Bank of England said. .

As such, UK banks' aggregate CET1 capital and Tier 1 leverage ratios remain above aggregate floor rates by 3.8 percentage points and 1.2 percentage points, respectively, at the low points of capital.

In addition, the institution has pointed out that the examination has taken into account the banks' balance sheets as of June 2022, while, since then, the capital ratios of the main UK banks have increased, since the CET1 capital ratio aggregate was 14.6% in the first quarter of 2023.

A key difference from previous stress tests was that assumed UK inflation averaged around 11% over the first three years of the scenario, peaking at 17%, causing real household income to fall by 13% and a stronger monetary policy response, with interest rates rising to 6% while UK GDP fell 5%, unemployment climbed to 8.5% and house prices plunged 31% .

Similarly, the UK's major trading partners would also experience similar shocks in the adverse scenario, as real GDP declined for all of the UK's major trading partners, and the global economy contracted by 2.5% in the first year. scenario, while global interest rates peaked at 4.7% for the European Central Bank deposit facility and 6.5% for the effective US federal funds rate?