Stress Test of British Banks

4 January 2015

In December 2014 the Bank of England published the results of the stress test of major British credit institutions. The test covered8 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.

Test Approach

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:

  1. Based on the balance sheets actual CET1 ratios were calculated for the banks being tested.
  2. The capital ratios for the adverse scenario and for the baseline scenario were calculated using an analytical framework consisting of a range of tools. If a bank's capital ratio was projected to fall below 4.5% in the stress test, the bank would be required to take actions to strengthen its capital position.
  3. For the purposes of the UK variant stress test, the banks should submit projections of both risk-based capital ratios and leverage ratios under the baseline and stress scenarios. The threshold values are 7.0% and 3.0% respectively.

List of Tested Banks

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.

NameRisk-Weighted Assets (bln GBP)
Barclays Bank plc442.0
The Co-operative Bank plc15.1
HSBC Bank plc1215.0
Lloyds Banking Group272.0
Nationwide Building Society40.6
The Royal Bank of Scotland plc429.0
Santander UK77.7
Standard Chartered Bank331.0

Adverse Scenario

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, triggeredinitially 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.

Stress Test Results

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.

NameActual CET1 (end 2013)Actual CET1 (mid 2014)Minimum stressed CET1
Barclays Bank plc9.110.07.0
The Co-operative Bank plc7.211.5-2.6
HSBC Bank plc10.811.28.7
Lloyds Banking Group10.112.05.0
Nationwide Building Society14.317.66.1
The Royal Bank of Scotland plc8.610.84.6
Santander UK11.611.87.6
Standard Chartered Bank10.510.57.1

5 of 8 Banks: Adequate Capital Ratios

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 Banks: Adequate Capital Ratios, but Required to Strengthen Their Capital Positions

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’scapital 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 positionneeded to be strengthened further. Since the end-2013 Lloyds Banking Group has deliveredpositive financial results and is continuing to take steps tostrengthen and de-risk the balance sheet, ahead of baselineprojections.

1 of 8 Banks: Inadequate Capital Ratios

  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.

Availability of Test Results at Corporate Websites

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.

NameTest ResultAvailable at corporate websites
Barclays Bank plcPassedNo
The Co-operative Bank plcFailedNo
HSBC Bank plcPassedYes
Lloyds Banking GroupPassed, *)No
Nationwide Building SocietyPassedYes
The Royal Bank of Scotland plcPassed, *)No
Santander UKPassedYes
Standard Chartered BankPassedNo

*) - The bank is required to strengthen its capital positions.

See Also

External Links

  1. Bank of England: 2014 Stress Testing