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In addition to an economic shock scenario created by the Bank of England, banks will from 2016 have to create simulated disasters tailored to their businesses and get them approved by regulators. They will then have to show they have the financial resources to pass these “idiosyncratic” tests under close supervision from the Bank’s Prudential Regulation Authority.
It come as the Government confirmed new powers for the Bank’s Financial Policy Committee over the housing markets. They will include the ability to limit the ratio of debt to income and the percentage of loan to house value banks are able to lend to borrowers at.
The FPC will also be able to limit banks’ “leverage ratio”, a measure of their ability to absorb losses on their lending. Separate consultations will be held over its call to be given powers over the buy to let mortgage market.
The addition of a new set of stress tests follows criticism that last year’s tests – focusing on a housing market shock – gave banks such as Standard Chartered and HSBC too easy a ride because their exposure to house prices was far less than big mortgage banks such as Lloyds or a building society like Nationwide.
The tests were ultimately failed only by Co-op, but both Lloyds and Royal Bank of Scotland scraped through and had to shake up their capital plans while the tests were running so they could achieve passing grades.
This year’s are likely to test the impact of a dramatic downturn in so-called emerging market economies, which should make them tougher for the beleaguered Standard Chartered, whose business is focused on Asia, and HSBC as well as Barclays, which has a big business in Africa.
The PRA is believed to have considered bringing in the tailored idiosyncratic disaster testing alongside them this year but ultimately settled on 2016 to give the current regime more time to bed in.
This year will be the first the Bank has run a test without a baseline scenario laid out by the European Banking Authority.
Full article on The Independent