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Co-operative, RBS and Lloyds fall short in BoE stress tests

Lucinda Beeman
Written By:
Lucinda Beeman

Lloyds and Royal Bank of Scotland have fallen short in Bank of England tests to determine their resilience in the event of a new financial crisis, while the Co-operative Bank has been ordered to submit a new capital plan.

The Bank’s stress tests, carried out with the oversight from the Prudential Regulation Authority (PRA) and the Financial Policy Committee, were designed to assess whether the UK’s big banks could survive a spike in unemployment to 12 per cent, a house price crash of 35 per cent, and an interest rate hike.

The report suggested the Co-operative Bank would be especially vulnerable to housing market stress, and consequently its capital buffer is being reset and it must submit a new capital plan.

However, the PRA said the Co-operative Bank had met all the targets it had been set over the last 18 months in terms of building its capital base.

Both Lloyds and RBS had capital buffers above the minimum required level as at the end of 2013, but the PRA said both banks needed to strengthen their capital positions further. The report added the two banks have already taken steps to improve their balance sheets, so they will not be required to submit new capital plans.

Barclays, HSBC, Nationwide, Santander UK and Standard Chartered were deemed to have adequate capital buffers to weather a fresh crisis.

In a statement, the Co-operative Bank said the new capital plan means it will not be profitable in 2014, 2015 and 2016, and it will have to reduce the size of its non-core division “significantly” by 2017.

Niall Booker, chief executive of the Co-operative Bank, said: “The bank is much stronger than a year ago. As the regulator notes today, we have achieved the target of building our capital base and the actions we have taken during the first year of our business plan have made the bank more secure for the benefit of all stakeholders.

“Our key ratios around capital, liquidity and leverage at the present time are significantly strengthened, we are ahead of schedule in the disposal of non-core assets and the stability of our core franchise is improving. However, given we are in the early stage of our plan, the original capital deficit and the nature of our assets, it is no surprise that we have not met the severe stress test hurdle today.”