The test, which is the first conducted under the Bank’s new approach to stress testing, examined the resilience of the system to a more severe stress than in 2014 and 2015. It also judged banks against the Bank’s new hurdle rate framework, which held systemic banks to a higher standard reflecting the phasing-in of capital buffers for global systemically important banks.
While the Prudential Regulation Authority (PRA) Board judged that some capital inadequacies were revealed for three banks (The Royal Bank of Scotland Group, Barclays and Standard Chartered), these banks now have plans in place to build further resilience.
The Financial Policy Committee (FPC) judged that, as a consequence of the stress test, the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario.
The PRA Board judged that:
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The test did not reveal capital inadequacies for four out of the seven participating banks, based on their balance sheets at end-2015 (HSBC, Lloyds Banking Group, Nationwide Building Society and Santander UK).
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The Royal Bank of Scotland Group (RBS) did not meet its common equity Tier 1 (CET1) capital or Tier 1 leverage hurdle rates before additional Tier 1 (AT1) conversion in this scenario. After AT1 conversion, it did not meet its CET1 systemic reference point or Tier 1 leverage ratio hurdle rate. Based on RBS’s own assessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incorporate further capital strengthening actions and this revised plan has been accepted by the PRA Board. The PRA will continue to monitor RBS’s progress against its revised capital plan.
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Barclays did not meet its CET1 systemic reference point before AT1 conversion in this scenario. In light of the steps that Barclays had already announced to strengthen its capital position, the PRA Board did not require Barclays to submit a revised capital plan. While these steps are being executed, its AT1 capital provides some additional resilience to very severe shocks.
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Standard Chartered met all of its hurdle rates and systemic reference points in this scenario. However, it did not meet its Tier 1 minimum capital requirement (including Pillar 2A). In light of the steps that Standard Chartered is already taking to strengthen its capital position, including the AT1 it has issued during 2016, the PRA Board did not require Standard Chartered to submit a revised capital plan.
The FPC judged that the system should be capitalised to withstand a test of this severity, given the risks it faced. It therefore welcomed the actions by some banks to improve their capital positions. Despite a more severe scenario, the aggregate low points for CET1 capital and Tier 1 leverage ratios were higher than in the 2014 and 2015 tests. The FPC noted the increased resilience to stress provided by banks’ AT1 capital positions and banks’ stated intention to reduce dividends in stress. It also noted the strong performance of the most domestically focused banks. Given the results, no system-wide macroprudential actions on bank capital were required in response to the 2016 stress test.
The FPC is maintaining the UK countercyclical capital buffer rate at 0% and reaffirms that it expects, absent any material change in the outlook, to maintain this rate until at least June 2017. This reflects developments since the stress test was launched in March, which suggest greater uncertainty around the UK economic outlook and an increased possibility that material domestic risks could crystallise in the near term. The FPC was concerned that banks could respond to these developments by hoarding capital and restricting lending.
That position has not changed.
Stress testing the UK banking system: 2016 results
Carney: UK is ‘investment banker for Europe’
Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient balance sheets, Mark Carney said the strength of the UK’s financial system was welcome in light of the possibility of a “UK-specific risk to financial stability” materialising in the coming years.
The governor said it was imperative that British businesses know “as much as possible, as early as possible” about the transition arrangements and the level of access to the EU’s internal market following the referendum.
“Having a degree of clarity, when appropriate, will help an orderly transition,” said Mr Carney.
He added that EU leaders should also push for a smooth Brexit, as the UK was “effectively the investment banker for Europe”. [...]
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