RBS and Lloyds barely pass Bank of England stress tests

Two lenders ‘remain susceptible to a severe economic downturn,’ says BOE

Mark Carney, governor of the Bank of England, pauses during a news conference . Photographer: Chris Ratcliffe/Bloomberg

Mark Carney, governor of the Bank of England, pauses during a news conference . Photographer: Chris Ratcliffe/Bloomberg

 

Royal Bank of Scotland and Lloyds barely passed stress tests set by the Bank of England, which said their capital at the end of last year fell short of requirements.

The two lenders “remain susceptible to a severe economic downturn,” the BOE said in a report today.

Hypothetical losses in the test lowered RBS’s core capital to 4.6 per cent, based on end-2013 data, just above the 4.5 per cent pass threshold. Capital at Lloyds came in at 5 per cent.

Co-Operative Bank failed the assessment, ending up at minus 2.6 per cent. The UK’s eight biggest banks were examined on their resilience to a range of shocks such as a 12 percent unemployment rate, a BOE benchmark interest rate of 4 percent and house prices falling by a third.

Today’s results were the first published by the central bank, which assumed the role of UK bank supervisor last year.

The BOE said that both Lloyds and RBS, the owner of Ulster Bank, took actions in 2014 to address the shortage of capital and don’t have to submit new plans to bolster resilience.

In contrast, Co-Op was required to submit a new plan to shrink its balance sheet, which was accepted by the Prudential Regulation Authority. While Chief Executive Officer Niall Booker has been cutting costs and selling assets to raise cash, Co-Op had signaled that it would fail the tests.

All other banks passed, with HSBC Holdings getting the highest core capital ratio, at 8.7 per cent in the assessment. Barclays ended the exams with 7 per cent, Santander UK and Standard Chartered had 7.6 per cent and 7.1 per cent, respectively. Nationwide Building Society had 6.1 per cent.

“This was a demanding test,” BOE governor Mark Carney said in a statement. “The results show the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress.”

The test of banks was published alongside the BOE’s semi- annual Financial Stability Report, which provides an overview of the strength of the financial system.

In the report, the BOE said the global economic outlook has weakened since June and concerns about geopolitical risk have increased. It said these could undermine financial stability if a “shift in global risk appetite triggers sharp adjustments in financial markets and undermines business and household confidence.” The BOE also highlighted a risk to stability from the drop in oil prices this year. While the decline doesn’t pose an immediate threat, it could affect the ability of some companies, such as US shale oil and gas exploration firms, to service their debt and “could affect market sentiment more broadly.”

Bloomberg