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Two major banks warned over stress tests

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01/12/2015
Royal Bank of Scotland (RBS) and Standard Chartered have been warned over the amount of capital they currently hold, but have been given the green light on stress tests conducted by the Bank of England.

All lenders passed this year’s stress tests, which also covers Barclays, HSBC, Lloyds Banking Group, Nationwide Building Society and Santander. The test is conducted by the Bank’s Financial Policy Committee (FPC) and members of the Prudential Regulation Authority (PRA) board.

Despite taking action to strengthen their capital position, RBS and Standard Chartered were found to have both failed in meeting the required amount set by the Bank. However, the Bank of England concluded that as both banks have taken steps to strengthen the amount of capital they hold, neither are required to submit a revised capital plan.

But it added that it was developing an approach to its stress testing that is explicitly ‘countercyclical’. This means each year it will include a scenario where the severity reflects policymakers’ systematic assessment of the state of the financial cycle.

The countercyclical buffer is currently set at a rate of 0% but the FPC plans to revisit the level at which this is set in March next year. According to the BBC, the extra capital needed will represent £10bn across UK banking.

Ewen Stevenson, chief financial officer at RBS, said it recognised the bank still had “much to do to restore RBS to be a strong and resilient bank for our customers.”

Group chief executive of Standard Chartered Bill Winters added: “The test was conducted on our balance sheet as at the end of 2014.

“Since then we have made further significant progress in strengthening our capital position. We are operating at capital levels above current minimum regulatory requirements and have a number of additional levers at our disposal to further manage capital.”

Since 2014, the UK’s major lenders have been tested on their ability to cope with number of adverse shocks to find out whether in the event of a crisis, they are not only able to withstand these shocks but also support the economy as a whole. Using different scenarios, policymakers test the UK’s major financial institutions to see if they hold enough capital to remain resilient in such cases.

This year, one of the key areas of focus used in the test’s scenario were stresses arising from an economic slowdown in Asia.

In 2014, the Bank incorporated scenarios where property prices and unemployment suffered significant shocks.

This year, tests have been less severe, with impairments on UK mortgage lending projected to be much lower compared to those on unsecured lending. The Bank explained that current high loan-to-value mortgages issued by lenders have remained much lower than in the run up to the 2008 financial crisis. Its scenario for 2015 also included lower interest rates compared to 2014 where a sharp rise in rates was incorporated.

In addition, projected buy-to-let impairments which featured in this year’s stress test were much less severe than last year.

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