This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.theguardian.com/business/2014/dec/16/bank-stress-tests-co-op-lloyds-rbs

The article has changed 4 times. There is an RSS feed of changes available.

Version 0 Version 1
Bank stress tests: Co-op fails as Lloyds and RBS scrape through Bank stress tests: Co-op fails as Lloyds and RBS scrape through
(about 11 hours later)
Three banks – the Co-operative Bank, Lloyds Banking Group and Royal Bank of Scotland – were found to be lacking financial strength by the Bank of England after being subjected to tests designed to measure their ability to withstand economic shocks. A severe economic shock would exhaust the Co-operative Bank’s capital and force Lloyds Banking Group and Royal Bank of Scotland to bolster their financial strength, the Bank of England found after exposing the banking sector to tests designed to measure their resilience.
In order to test the resilience of the financial sector, the central bank created a hypothetical scenario involving a deep recession, an unprecedented collapse in house prices, soaring unemployment and a sharp rise in interest rates. The central bank created a hypothetical scenario involving a deep recession, an unprecedented collapse in house prices, soaring unemployment and a sharp rise in interest rates over a three year period beginning at the end of 2013.
Threadneedle Street stressed it was not handing out a pass or fail on the eight lenders exposed to the extensive exercise, nor did it intend to order any system-wide changes to the banking industry. The results of the tests on eight lenders yesterday came as markets focused on the turmoil in the Russian economy and Threadneedle Street said next year its tests would focus more on risks in emerging markets.
Only the Co-op Bank – whose capital would be “exhausted” under the most severe stress test – was ordered to submit a revised plan to the Bank. It was the only one to fall below the 4.5% minimum core tier one capital ratio – a key measure of financial strength – set by the central bank. The Co-op bank fared worst under the first annual stress tests, brought in as a response to the 2008 banking crisis. It was was the only bank to be ordered to submit a revised plan after the exercise found its capital would be “exhausted” under the stressed scenario.
Owned by the Co-operative Group until last year, the Co-op bank had already warned it might fail the test. Owned by the Co-operative Group until last year, the Co-op bank had already warned it might fail the test. It was the only one to fall below the 4.5% minimum core tier one capital ratio – a key measure of financial strength – set by the central bank. Threadneedle said its capital would fall into negative territory under the terms of the hypothetical tests, although its actual capital position is much stronger.
The results published on Tuesday showed its capital would fall into negative terrority, knocked by losses on commercial property loans under the hypothetical scenario. Niall Booker, brought in during last year’s crisis to run the Co-op Bank, said it would now accelerate its plan to pull back from its Optimum portfolio of higher risk mortgages that were granted by Britannia before its merger with Co-op in 2009. Some £5.5bn of the higher risk assets - 40% - are to be shed by 2018.
Bailed-out RBS, 81% owned by the taxpayer, would have been required to submit new plans had it not already begun to raise its capital buffers at the end of 2013, which was the starting point for the tests. . Booker insisted there would no fire sale although the bank would now make losses into 2016 - a year longer than previously anticipated.
Lloyds, which is 24% owned by the taxpayer, was not required to submit new plans although it may now face questions about its ability to resume paying dividends to shareholders for the first time since the 2008 banking crisis. The bailed out banks RBS and Lloyds were both close to the hurdle rate. Bailed-out RBS, 79% owned by the taxpayer, would have been required to submit new plans had it not already begun to raise its capital buffers at the end of 2013. “We recognise that there is still much work to be done to improve the resilience of our balance sheet,” said RBS finance director Ewen Stevenson.
The Bank of England governor, Mark Carney, said policy makers had been reassured about the banking sector after the first ever industry-wide stress tests, which are to become an annual event. Lloyds, which is 24% owned by the taxpayer, was not required to submit new plans and will find out in the New Year if it is able to resume paying dividends to shareholders for the first time since the 2008 banking crisis.
“This was a demanding test. The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited,” Carney said. António Horta-Osório, Lloyds boss, said the bank had increased its capital since the end of 2013.
Publishing its half-yearly outlook on risks to the financial system, the Bank of England also said the global economic outlook had weakened from six months ago. It added: “The recent sharp fall in the oil price should support global and UK growth but it also entails some risk to financial stability.” The Bank of England governor, Mark Carney, said policymakers were reassured. “This was a demanding test. The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited,” he said.
The bank also said its financial policy committee had been worried in June about the risk of the housing market and debt levels in UK households, which remain high relative to income. While the banking system was stronger than the 2008 banking crisis there were still other concerns. “Recent misconduct and other operational failings have highlighted that rebuilding confidence in the banking system requires more than financial resilience. That, and changes to banks’ business models in response to commercial and regulatory developments, make it important for banks to continue to enhance the effectiveness of their governance arrangements,” the Bank of England said.
HSBC, Barclays, Santander UK, Standard Chartered and the Nationwide building society were the five other institutions tested and were not found to have any capital inadequacies. They were not required to submit new plans to the Bank of England’s regulation arm, the Prudential Regulation Authority. HSBC, Barclays, Santander UK, Standard Chartered and the Nationwide building society were the five other institutions tested and were not found to have any capital inadequacies. They were not required to submit new plans to the Bank of England. HSBC and Standard Chartered might be the focus next year when the Bank of England puts more emphasis on global risks.
Over the three-year test period, which ran from the end of 2013 to the end of 2016, the banks made £13bn of losses before making profits in the third year. Without the series of economic stresses, the lenders were projected to make £100bn of profits over the three years. The Bank said that over the three-year test period from the end of 2013 to the end of 2016, the eight lenders would have made £13bn of losses before making profits in the third year. Without the series of economic stresses, the lenders were projected to make £100bn of profits over the three years.
Impairment charges would rise by £70bn under the stress tests. Capital ratios are also severely affected, with systemwide ratios falling from 10% to 7.3%. Impairment charges would rise by £70bn under the stress tests. Capital ratios were also severely affected, with system-wide ratios falling from 10% to 7.3%. Economists at Capital Economics said that was a higher ratio that had actually been achieved in 2011.
The Bank of England also took into account actions that banks could have taken during the three-year period, which included cutting staff costs and dividends, and changes in lending patterns. But banks were not allowed to reduce their lending to the economy. The Bank of England took into account actions that banks could have taken during the three-year period, which included cutting staff costs and dividends, and changes in lending patterns. But banks were not allowed to reduce their lending to the economy and Samuel Tombs, senior UK economist at Capital Economics, said he expected the supply of credit to increase next year.
The Bank has stepped back from including more banks in the tests next year and warned that the leverage ratio – another way of measuring financial strength – would become part of the test in the future. The Bank has stepped back from including more lenders in the tests next year and warned that the leverage ratio – another way of measuring financial strength – would become part of the test in the future.
The Bank of England said that while the banking system was stronger than the 2008 banking crisis there were still other concerns. “Recent misconduct and other operational failings have highlighted that rebuilding confidence in the banking system requires more than financial resilience. That, and changes to banks’ business models in response to commercial and regulatory developments, make it important for banks to continue to enhance the effectiveness of their governance arrangements,” the Bank said. Steven Hall, banking risk partner at KPMG, said this would prove tougher. “On the face of it these results provide limited festive cheer and the Scrooges amongst us would note that if a 3% stressed leverage ratio had been set for this exercise half of the banks would have failed with a cumulative balance sheet de-leveraging of more than £350bn required,” Hall said.