4 January 2015
In December 2014 the Bank of England published the results of the stress test of major British credit institutions. The test covered 8 major credit institutions of the United Kingdom (7 banks and 1 building society, hereafter referred to as "banks" for simplicity) and assessed the impact of a variant of the EU-wide adverse scenario. Of out 8 assessed banks, 1 bank failed the assessment and 2 more passed the assessment but were required to improve their capital positions.
The stress test had a lot in common with the ECB-stress test. As in the ECB-test, Common Equity Tier 1 (CET1) was the main metric used for the assessment. The both tests had the same 3-years horizon (2014-2016). The procedure of conducting the test was also similar:
8 major banks of the United Kingdom were tested. The list of these banks with their risk-weighted assets is given below. Risk-weighted assets is a measure of the amount of a banks assets, adjusted for risk: the more risky a bank asset, the less is its risk-weighted value.
|Name||Risk-Weighted Assets (bln GBP)|
|Barclays Bank plc||442.0|
|The Co-operative Bank plc||15.1|
|HSBC Bank plc||1215.0|
|Lloyds Banking Group||272.0|
|Nationwide Building Society||40.6|
|NATWEST MARKETS PLC||429.0|
|Standard Chartered Bank||331.0|
The adverse scenario applied for the stress test was not a forecast of macroeconomic and financial conditions in the United Kingdom (UK variant scenario). It was a coherent, modelled scenario that was designed specifically to assess the resilience of banks to a household sector stress.
The UK variant scenario is broadly consistent with the global elements of the EU-wide scenario (which involves a sharp downturn in economic activity internationally, triggered initially by a rise in investor aversion to long-term fixed income securities), and hence the UK variant scenario includes deterioration of the main macroeconomic and financial indicators, such as: GDP, consumer price index, unemployment rate, government bond yields, house price index, real and nominal wages.
The stress scenario would reduce the aggregate CET1 ratio across the 8 banks from 10.0% in 2013 to a low point of 7.3% in 2015. The capital ratios for the tested banks are shown at the table below.
|Name||Actual CET1 (end 2013)||Actual CET1 (mid 2014)||Minimum stressed CET1|
|Barclays Bank plc||9.1||10.0||7.0|
|The Co-operative Bank plc||7.2||11.5||-2.6|
|HSBC Bank plc||10.8||11.2||8.7|
|Lloyds Banking Group||10.1||12.0||5.0|
|Nationwide Building Society||14.3||17.6||6.1|
|NATWEST MARKETS PLC||8.6||10.8||4.6|
|Standard Chartered Bank||10.5||10.5||7.1|
The stress test did not reveal any capital inadequacies for 5 out of the 8 banks, given their balance sheets at end-2013:
The risk-weighted assets of these 5 banks comprise 74.6% of the 8 tested banks.
2 of 8 tested banks had adequate capital ratios but were required to strengthen their capital positions. The risk-weighted assets of these 2 banks comprise 24.8% of the 8 tested banks.
The Royal Bank of Scotland Group’s projected CET1 ratio remains above the 4.5% CET1 threshold in the stress scenario. However, it was judged that, as at December 2013, the bank’s capital position needed to be strengthened further and The Royal Bank of Scotland Group has taken actions to do so.
Lloyds Banking Group’s projected CET1 capital ratio remains above the 4.5% CET1 threshold in the stress scenario. It was judged, however, that, as at December 2013, the bank’s capital position needed to be strengthened further. Since the end-2013 Lloyds Banking Group has delivered positive financial results and is continuing to take steps to strengthen and de-risk the balance sheet, ahead of baseline projections.
The Co-operative Bank’s CET1 capital resources are projected to be exhausted in the stress scenario. The Co-operative Bank is currently delivering a recovery plan. The bank’s CET1 ratio improved from 7.2% at end-2013 to 11.5% at end-June 2014, which is above the baseline projections. The risk-weighted assets of The Co-operative Bank comprise 0.5% of the 8 tested banks.
As of 3 January 2015, of the 3 banks that need to improve their capital position, only The Royal Bank of Scotland published a statement about the stress test results on its corporate website: Statement on the publication of the 2014 Bank of England stress test results .
|Name||Test Result||Available at corporate websites|
|Barclays Bank plc||Passed||No|
|The Co-operative Bank plc||Failed||No|
|HSBC Bank plc||Passed||Yes|
|Lloyds Banking Group||Passed, *)||No|
|Nationwide Building Society||Passed||Yes|
|NATWEST MARKETS PLC||Passed, *)||No|
|Standard Chartered Bank||Passed||No|
*) - The bank is required to strengthen its capital positions.