The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning.
Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession of 1.9 per cent of GDP and a more than 30 per cent fall in UK house prices over five years.
Here are the key takeaways:
- RBS is the biggest loser: the state-controlled bank emerged bottom of the pile, suffering the second-highest ever percentage fall in capital under the stressed scenario after the Co-operative Bank in 2014
- Capital plans: RBS’s failure means it has now presented regulators with a plan to cut costs and sell-off some of its assets to address its capital shortfalls. Responding to the results, RBS said it would take an “array of capital management actions” which would amount to at least £2bn
- Better than previous years: This year’s stress tests were the toughest ever conducted by the BoE and overall, lenders emerged with stronger balance sheets and higher overall capital levels to withstand major economic shocks.
- Barclays and StanChart: These were the two other big lenders who failed to meet some of the BoE’s minimum hurdles, but, unlike RBS, were judged to have had sufficient capital-lifting plans in place
- Financial stability: releasing its latest outlook on financial stability, the BoE warned of “existing vulnerabilities” in the financial system, which have been compounded by the US election and Britain’s vote to leave the EU.
- Carney praise: Speaking on Wednesday, governor of the BoE Mark Carney praised banks for their “greater balance sheet resilience” and said the domestic banking system was well placed to keep providing households with credit in times of economic stress
- Brexit warning: Mr Carney also praised the results in light of the UK’s Brexit vote. This resilience “may prove valuable” in light of the prospect of a “UK specific risk to financial stability” materialising, said the governor
- Italian banks: ahead of a key referendum in Italy next Sunday, the BoE flagged the challenges faced by the country’s banks, which have suffered questions over their attempts to raise private capital and could be forced to impose losses on creditors