Co-operative the only British bank to fail ‘doomsday’ stress tests

A power cut at the Bank of England added to the drama of the banking stress tests on Tuesday, as reporters and officials were forced to quit Threadneedle Street and trek across the city to facilities in Moorgate for their televised press conference.

Reporters had been locked in at the central bank from 5am, digesting the results of the bank’s wide-ranging exercise to test the resilience of the sector to a series of catastrophic economic events.

The “doomsday scenario,” deemed a tougher test than the one conducted by the European authorities last autumn, included a calamitous 35 per cent crash in house prices; a sharp rise in interest rates and inflation; a severe contraction in economic growth, a plunge in the value of sterling and a doubling of the unemployment rate to 12 per cent.

Having already raised billions to bolster their balance sheets, how would the banks fare? While bank officials were keen to avoid such vulgar terms as "pass" and "fail", the one clear failure of the eight subjected to the test was the Co-operative Bank, which almost went bust last year. And, despite having billions of pounds pumped into them, the bailed-out Royal Bank of Scotland and Lloyds Banking Group barely scraped through.

The central bank set a minimum target for core tier one capital ratio of 4.5 per cent, comprehensively missed by the Co-op, which came in at minus 2.6 per cent under the stress test scenario. RBS made it by a whisker, at 4.6 per cent, while Lloyds managed 5 per cent. At the top of the scale was HSBC, with 8.7 per cent followed by Santander UK at 7.6 per cent; Standard Chartered at 7.1 per cent; Barclays at 7 per cent; and Nationwide at 6.1 per cent.

More resilient

While governor Carney said the tests showed that the core of the banking system was “significantly more resilient” than at the time of the 2008 banking crisis, he made it clear that this would not be the end of it, even for those banks that sailed through.

The stress tests are to be an annual event, and next year’s will be even tougher, as it will include risks from overseas markets. That will be a worry for banks such as HSBC, as it has far broader global exposure than the Co-op or RBS.

With the Russian rouble in freefall and a rout underway in emerging markets, the Bank won’t have to look too hard for inspiration for next year’s doomsday scenarios.

Unexpectedly slowed

There was an early Christmas present for Britain’s cash-strapped consumers on Tuesday, as inflation unexpectedly slowed to its lowest level in over 12 years.

Chancellor George Osborne, in full electioneering mode, was swift to claim the credit, attributing the fall to the government's adherence to its "long-term economic plan".

It’s a phrase he trots out whenever there is a glimmer of good news on the economic front, but the real credit should go to tumbling oil prices and the ferocious price war being waged by the supermarkets.

They were the real drivers of a fall in the Consumer Prices Index from 1.3 per cent to just 1 per cent last month, against City expectations of around 1.2 per cent for November. This is the lowest increase in the cost of living since September 2002, and is welcome news for households struggling to cope with the severe squeeze on real incomes in recent years.

Publishing the figures, the Office for National Statistics highlighted the dramatic fall in oil prices, which have brought down costs of road and air travel. Petrol prices fell by almost 6 per cent last month, while food prices dropped by 1.7 per cent.

The fierce price war being waged by the supermarkets, sparked by the huge success of Aldi and Lidl, helped push down food prices. The frenzied discounting by the wider retail sector on Black Friday also had an impact, pushing down prices of electrical products such as televisions and tablets.

Open letter

The government’s inflation target remains at 2 per cent and Tuesday’s fall raises the prospect of Bank of England governor Mark Carney having to write an open letter to the Chancellor explaining why inflation is so low.

Such letters are required if inflation rises more than one percentage point above or below the 2 per cent target. The previous Bank governor, Mervyn King, was forced to pen numerous letters to the Chancellor when inflation rose above 3 per cent and stayed there stubbornly, but Carney's letter will be the first to explain why inflation has undershot the official target.

Fiona Walsh is Business Editor of theguardian.com