Britain’s seven biggest lenders will have to show they can cope with a global economic slump triggered by a sharp slowdown in China and a crash in the eurozone in this year’s round of stress tests conducted by the Bank of England (BoE).
The UK decided to introduce annual stress tests for its banks after the 2007 to 2009 financial crisis which required taxpayers to pump £66bn (€90bn) into Royal Bank of Scotland and Lloyds Banking Group.
“By assessing the resilience of the UK banking system against a major external shock, we will improve further our ability to identify vulnerabilities and we will ensure that banks have plans in place to address a wider range of possible stresses,” BoE governor Mark Carney said yesterday.
The bank also said the Co-operative Bank, which failed last year’s tests and is deep in a restructuring programme, would not be assessed, as it is now too small. That leaves six banks and one mutual lender to face this year’s tests — Barclays, HSBC, RBS, Standard Chartered, Nationwide Building Society, Santander UK, and Lloyds.
The global downturn scenario which the lenders will have to prove they could survive includes various financial shocks such as a contraction of more than 2% in the eurozone economy. but not a Greek exit.
It also sets out the prospect of a slowdown in economic growth in China to 1.7% of GDP by the end of this year, tipping Hong Kong into a deep recession. That would cause a 40% slump in Hong Kong property prices, hitting lenders such as HSBC. Commodities would also take a hit if the oil price troughs at $38 (€35) a barrel.
Last year’s tests, in which the Co-op was the only one to fail, largely focused on a 35% crash in UK housing prices amid concerns that the property market was in danger of overheating to the point of creating a bubble.
In the 2015 tests, the British house price fall has been set at 20% over the five-year scenario period, the BoE said. The UK-specific focus last year caused some critics to say HSBC and Standard Chartered got off lightly. Both banks already face pressure from some investors to relocate many UK operations to Asia after a jump in UK bank taxes.
HSBC, 40% of whose assets are in Asia on a risk-weighted basis, had no comment. StanChart, with 59% of its risk-weighted loans in Asia, said it would examine the details. The results are due to be published in December. Shares in all those being tested were flat to higher after the news, in line with the London market’s Ftse 100 index.
Under the tests, banks will have to show they can maintain a Tier 1 core capital adequacy ratio of 4.5% of risk-weighted assets after being exposed to the theoretical shocks, the same pass mark as 2014.
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