A new BOE Bank stress tests benchmark has been introduced, making it more difficult for banks to pass the annual health check. Having a higher bar set, which UK banks will pass or fail?
28 November, AtoZForex – The Bank of England (BOE) has added a higher bar to the third round of public stress tests. Some UK banks are expected to pass them, whereas other banks may fail the test. According to Autonomous Research LLP, the seven biggest UK lenders examined will likely pass the lowest measures of strength set by the BOE.
The Royal Bank of Scotland Group Plc and Barclays Plc are expected to face a soft to fail. While China’s slowdown may affect the performance of HSBC Holdings Plc and Standard Chartered Plc. The remaining banks included in the BoE public stress tests are Lloyds Banking Group Plc, Banco Santander SA and Nationwide Building Society.
New BoE Bank stress tests benchmark: SRP
Each bank is now required to exceed both its individual hurdle rate and a new threshold. The new treshold is called the systematic reference point (SRP). The new hurdle takes into consideration the consequences on the global economy in case the lender fails. If any of the lenders don’t pass either requirement, the bank will need to increase its capital ratios. However, when the bank only fails the SRP, then the BoE forces the lender to take “less intensive” action.
The hurdle rate obliges banks to retain capital equal to 4.5 percent of their assets weighted by risk. Also, Pillar 2A which ranges depending on the specific risks for each bank. According to an analyst at CreditSights in London, none of the lenders should fail the hurdle rate. Lenders that fall short but are globally important may be given more time to raise capital or be allowed to issue additional Tier 1 bonds rather than equity.
China’s slowdown affects HSBC and Standard Chartered
For 2016, the test will include scenarios of a decline in Hong Kong and China. Along with a 1.9 percent contraction in the global economy. Moreover, an exchange-rate volatility has been recorded, since the US dollar appreciated against the emerging-market currencies. Apart from that, it projects a 31 percent crash in British house prices during the five-year period. Whilst, the UK commercial real estate plunges 42 percent. However, the BoE model does not include the impact of the actual Brexit or its negotiation phase.
The Asia-focused HSBC Holdings Plc and Standard Chartered Plc are facing a major threat by the slowdown in China. These two lenders might fail the new BoE Bank stress tests benchmark, due to the China crisis scenario. Also, Barclays may face some difficulties passing the test. Since its common equity Tier 1 ratio gives it the lowest starting point among lenders. However, the bank is planning to boost capital reserves by selling its African business.
Will BOE’s bank stress tests become more adverse in 2017?
According to Edward Chan, banking partner at Linklaters LLP in London, the tests in 2017 could include the political factors. The constitutional referendum in Italy, Britain’s divorce talks, French and German elections, could play an essential role in the 2017 BoE public stress tests. Edward Chan further commented that:
“We could be looking at high market volatility in 2017, with contagion to U.K. banks a very real risk. Sound capital positions are therefore critical.”
Think we missed something? Let us know in the comments section below.