Stress is less for banks after Bank of England test
It’s been a good year for banks as in a first since the launch in 2014, the Bank of England (BoE) reveals that no bank needed to strengthen its capital position as a result of its latest stress test.
BoE continues to stress test the UK’s banks with an economic scenario test more severe than the 2008 financial crisis.
In the latest test, banks incurred losses of around £50 billion in the first two years. This scale of loss was relative to their assets and would have wiped out the common equity capital base of the UK banking system ten years ago.
Interestingly, the test showed these losses could now be absorbed within the buffers of capital banks have on top of their minimum requirements.
Further summarised was the aggregated results of capital positions. With it strengthening in the past decade, banks started the test with a tier 1 leverage ratio of 5.4% and a tier 1 risk‑weighted capital ratio of 16.4%.
Even after the severe losses in the test, banks still had a tier 1 leverage ratio of 4.3%, an aggregate common equity tier 1 (CET1) capital ratio of 8.3% and a tier 1 capital ratio of 10.3%. Resulting in a CET1 ratio of 13.4% — three times stronger than a decade ago.
This meant that banks would be able to continue to supply credit to the economy if demanded, even if in the most extreme cases of pressure.
Banks have continued to build their capital strength during 2017. This certainly makes for a change as last year Royal Bank of Scotland (RBS) failed the test. The same went for Barclays and Standard Chartered on some measures.
As a result, the Prudential Regulation Committee (PRC) decided that all participating banks have sufficient capital to meet the standard set by the test. This lead to the Financial Policy Committee (FPC) to increase the UK countercyclical capital buffer rate from 0.5% to 1%.
BoE says the setting of buffers will not require banks to strengthen their capital positions. It instead, will require them to incorporate some of the capital they currently have in excess of their regulatory requirements into their regulatory capital buffers.
The results of BoE’s findings are in a 66-page report, which can be found here.
The BoE also shared a handy infographic on the latest financial stability, shown below: