Bank of England: Stress testing the UK banking system: 2016 results

30 November 2016

Bank of England has announced the results of its 2016 stress test of the UK banking system. The 2016 stress test incorporated a synchronised UK and global recession with associated shocks to financial market prices, and an independent stress of misconduct costs.

The test, which is the first conducted under the Bank’s new approach to stress testing, examined the resilience of the system to a more severe stress than in 2014 and 2015. It also judged banks against the Bank’s new hurdle rate framework, which held systemic banks to a higher standard reflecting the phasing-in of capital buffers for global systemically important banks.

While the Prudential Regulation Authority (PRA) Board judged that some capital inadequacies were revealed for three banks (The Royal Bank of Scotland Group, Barclays and Standard Chartered), these banks now have plans in place to build further resilience.

The Financial Policy Committee (FPC) judged that, as a consequence of the stress test, the banking system is in aggregate capitalised to support the real economy in a severe, broad and synchronised stress scenario.

The PRA Board judged that:

The FPC judged that the system should be capitalised to withstand a test of this severity, given the risks it faced. It therefore welcomed the actions by some banks to improve their capital positions. Despite a more severe scenario, the aggregate low points for CET1 capital and Tier 1 leverage ratios were higher than in the 2014 and 2015 tests. The FPC noted the increased resilience to stress provided by banks’ AT1 capital positions and banks’ stated intention to reduce dividends in stress. It also noted the strong performance of the most domestically focused banks. Given the results, no system-wide macroprudential actions on bank capital were required in response to the 2016 stress test.

The FPC is maintaining the UK countercyclical capital buffer rate at 0% and reaffirms that it expects, absent any material change in the outlook, to maintain this rate until at least June 2017. This reflects developments since the stress test was launched in March, which suggest greater uncertainty around the UK economic outlook and an increased possibility that material domestic risks could crystallise in the near term. The FPC was concerned that banks could respond to these developments by hoarding capital and restricting lending.

That position has not changed.

Stress testing the UK banking system: 2016 results

Carney: UK is ‘investment banker for Europe’

Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient balance sheets, Mark Carney said the strength of the UK’s financial system was welcome in light of the possibility of a “UK-specific risk to financial stability” materialising in the coming years.

The governor said it was imperative that British businesses know “as much as possible, as early as possible” about the transition arrangements and the level of access to the EU’s internal market following the referendum.

“Having a degree of clarity, when appropriate, will help an orderly transition,” said Mr Carney.

He added that EU leaders should also push for a smooth Brexit, as the UK was “effectively the investment banker for Europe”. [...]

Full article on Financial Times (subscription required)


© Bank of England