RBS and Standard Chartered ‘weakest’ links in Bank of England stress tests

The test did not reveal capital inadequacies for five out of the seven banks.

It also revealed that smaller banks are dishing out riskier buy-to-let mortgages as they try to attract new customers, which has involved relaxing affordability checks and lending to customers with smaller deposits.

“The system is in sight of where it needs to be”, Bank of England Governor Mark Carney told reporters.

“This is a positive, particularly for Lloyds where distributions are particularly geared to capital requirements”. “UK banks are now significantly more resilient than before the global financial crisis”, he declared.

This was due to differences in the banks’ business models and where in the world they were exposed to risk, especially as the simulation envisaged a crisis in Asia and emerging markets.

The U.K.-focused banks led the stock rises.

Shares in Lloyds were up 2.8 per cent in early trading, with RBS, Barclays and Standard Chartered up about 2.2 per cent and HSBC up 1.3 per cent.

He welcomed the PRA’s intention to review underwriting standards and said “the FPC will monitor developments in buy-to-let activity closely”.

“While Babcock is an excellent operator with solid barriers to entry in a growing market, we now see too many risks for comfort around its shares’ investment case”, analysts at the United States bank said in a note. While it could require an extra 10 billion pounds of capital if brought in next year, the BoE will take most of that out of existing ratios. The Bank said a persistent current account deficit could lead to a sudden outflow of capital and a collapse of sterling. Meanwhile fines for bad behavior shot up.

In the 2015 edition, the Bank of England tested the banks on the basis of a common equity Tier 1 ratio of 4.5% of risk-weighted assets, plus a 3% additional leverage ratio threshold.

RBS and Standard Chartered both in fact technically failed to meet their targets based on their balance sheets at the end of past year, but the rather drastic ongoing restructuring programmes under Ross McEwan and ‘Nuclear’ Bill Winters respectively were sufficient to allay the central bank’s fears, for now.

The projections showed RBS, bailed out by the taxpayer in the last downturn, did not meet its individual capital level expected by the regulators in the stress scenario. It tests the bank’s ability to survive a financial crash.

The BoE’s second public stress test is helping restore investor confidence in the financial system seven years after the global crisis forced the government to bail out lenders including RBS andLloyds Banking Group.

Officials cited potential threats from certain corners of the real-estate market and financial-market fragility, but concluded the risks weren’t strong enough to warrant any new policy actions.