All of Britain’s biggest banks are strong enough to survive another major recession, the Bank of England said, although Royal Bank of Scotland and Standard Chartered came close to failing their annual stress tests, reports The Telegraph.
The fictional scenario tested the banks’ financial strength against a hypothetical crash in China and emerging markets, spreading economic chaos around the world.
Such a recession would hit RBS hard, knocking its leverage ratio to 2.9 per cent, below the 3p per cent minimum and indicating the bank is overstretched.
However, the tests were based on RBS’ finances at the end of 2014. Since then, the bank has shored up its balance sheet enough to satisfy Bank of England officials who say they won’t be ordering RBS to take further action.
Standard Chartered, which specialises in emerging markets, felt the strain of the stress tests, missing its tier one capital target of 6 per cent.
But it too is already taking action, including a $5.1bn rights issue designed to build up the capital buffer. As a result, it has not been ordered to take further action.
Other banks – Lloyds, Barclays, HSBC, Santander UK and Nationwide Building Society – passed the tests by a more substantial margin.
However, they will have to pass higher hurdles in the coming years as the annual tests get progressively tougher.
That could force banks to retain more of their earnings by, for instance, giving out less cash in dividends to shareholders or paying fewer or lower bonuses to staff.
RBS promised to work harder to satisfy regulators.
“We are pleased with the progress we have made relative to the 2014 stress tests, but recognise we still have much to do to restore RBS to be a strong and resilient bank for our customers,” said finance director Euan Stevenson.
“During 2015 we have continued to strengthen our core capital ratio and improve our leverage ratio,” he added, citing the sale of its US bank Citizens as an example of drastic action to cut RBS’ overseas exposure and improve its capital position.
Standard Chartered’s chief executive Bill Winters said: “The results of the test demonstrate our resilience to a marked slowdown across the key markets in which we operate. 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.”
Lloyds Banking Group came through with buffers among the strongest after the stress test.
“We are pleased to have comfortably exceeded the thresholds under this year’s PRA stress test,” said chief executive António Horta-Osório.
“These strong results, which again reflect a material stress to the UK economy, demonstrate the progress we have made in de-risking our balance sheet as well as the Group’s strong capital position and capital-generative business model”.
Next year’s stress test is expected to focus on the impact of a hypothetical crash in the US economy.
Asset managers will also face tests next year on how they would deal with investors pulling out their money en masse.
Alongside the results of the stress tests, the Bank of England published its half-yearly Financial Stability report in which it set out plans to require banks to hold as much as £10bn extra capital as the credit cycle moves into a more normal phase.
The Bank of England fears lending is growing too rapidly and wants banks to increase their capital buffers.
These buffers are designed to be increased in the boom years and cut in a downturn, in a bid to make sure banks hold sufficient capital against potentially risky loans to help them stay afloat and continue to lend in a future recession.
