British banks pass BoE stress tests

This year, the central bank tested banks on whether they could withstand Chinese economic growth falling to 1.7% from 7%, a collapse in Euro area growth to -2.6% and a massive deflationary spiral that sees prices fall the most in the United Kingdom in 80 years. The BoE’s banks supervisor, the Prudential Regulation Authority (PRA), decided both had already done enough to address the shortfall. However, they have taken steps to improve their financial strength and the BoE did not instruct them to submit new capital plans.

Meanwhile, Europe would be faced with a three-year slump as domestic demand fell and world trade and commodity prices suffered, leading to long-term market uncertainty and investors retreating into “safe-havens”.

Shares in British lenders rose today, after results of a Bank of England stress test showed all the banks it tested had passed.

The figure was based on the approximately £43 billion in fines and costs paid and provided for by the banking sector since 2009.

It applied a hypothetical stress scenario including an economic slowdown in Asia.

BoE analysts used the lenders’ own models, as well as in-house models and statistical analysis. The Group continues to expect to generate 1.5 – 2.0 per cent of CET1 per year before dividends and, while capital rules are still evolving, continues to target a steady state CET1 ratio of around 12 per cent plus an amount broadly equivalent to a further year’s ordinary dividend.

The Bank noted that buy-to-let investors were subject to less stringent affordability tests than loans to owner-occupiers and potentially more vulnerable to an unexpected rise in interest rates or a fall in income.

Earlier this month, the Bank of England’s chief economist, Andy Haldane, said consumer credit was expanding at “a rate of knots”, although deputy governor Ben Broadbent has said Britain’s economic recovery is not a debt-fuelled boom.

The two banks, along with Barclays and RBS saw the “vast majority” of losses in their risk trading arms.