Word on the web: Bank of England stress tests reveal good news

RBS’s failure to pass the Bank of England’s annual stress tests may have dominated headlines recently, but the wider results are, overall, good news for the UK banking sector, which is growing in capital strength

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Investors braced themselves for a tough ride this week as the Bank of England (BoE) prepared to release the results of its third annual stress testing of Britain’s biggest banks. Hayley Kirton at City AM reported banking stocks to be among the biggest fallers on the FTSE 100 on Monday. The Royal Bank of Scotland (RBS) suffered the largest fall to its share price – by 2.1% – while Lloyds Bank was down 1.6%, Barclays 1%, HSBC 0.9% aInvestors braced themselves for a tough ride this week as the Bank of England (BoE) prepared to release the results of its third annual stress testing of Britain’s biggest banks. Hayley Kirton at City AM reported banking stocks to be among the biggest fallers on the FTSE 100 on Monday. The Royal Bank of Scotland (RBS) suffered the largest fall to its share price – by 2.1% – while Lloyds Bank was down 1.6%, Barclays 1%, HSBC 0.9% and Standard Chartered 0.2%.

That market sentiment turned out to be a pretty accurate reflection of what materialised on Wednesday 30 November 2016 when the BoE published its results. Reports of RBS’s failure to clear the required hurdles were widespread. The Financial Times' Martin Arnold and Caroline Binham said the news was a real blow to the UK Government, which is keen to start selling off its majority stake in the bank, which RBS puts at 73%. Other shareholders, who wanted dividend payments to resume, would also be disappointed. 

The bank swiftly updated its plans for further capital strengthening, reported the Financial Times. Measures included further decreasing the cost base of the bank, and running down and selling some non-core loan portfolios. The BoE accepted the plans, which bolster RBS’s capital strength by around £2bn. 

Financial Times article
Some good newsIt wasn’t all bad news, however. While Barclays and Standard Chartered also failed to meet certain minimum standards, they were judged to have sufficient capital-raising plans already in place, reported The Telegraph's Tim Wallace. Lloyds Bank, HSBC, Nationwide and Santander UK all passed. The BoE said that, in general, the banking system had continued to increase its overall levels of capital and had stronger balance sheets than in previous years.

So where is RBS falling down? Its test failure is partly down to heavy litigation costs still hanging over the bank. Wallace reminded readers that the Edinburgh-based bank still faces a multibillion dollar charge from US authorities for claims that it missold toxic mortgage-backed securities prior to the 2008 financial crisis. It is also still struggling to divest of Williams & Glyn – a subsidiary bank it was ordered to shed as part of its bailout by the UK Government in 2008.

The Telegraph article Tough scenarios As unwelcome as the news was for RBS, it’s worth bearing in mind that all of the banks under the spotlight faced the toughest stress scenarios ever modelled by the BoE. Forbes' columnist Frances Coppola pointed out that while a year ago minimum capital requirements were 4.5%, this year they climbed to 6.6%, and systemically important banks, such as RBS, faced an additional layer of capital requirements.
73%
The proportion of RBS that the UK Government owns

The Guardian's Jill Treanor focused in on the BoE’s warning of a “challenging period of uncertainty around the domestic and global economic outlook”.

On the home front, the Bank highlighted uncertainty created by June’s vote to leave the EU. The commercial property sector has experienced a 2.6% fall in prices since the result and that could fall further. UK household debt levels are also rising; lending increased by 4.1% in the year to September, which is close to the fastest rise since the 2008 financial crisis. A reduction in foreign investors buying UK debt was also highlighted as a risk.

Overseas, Donald Trump’s election to the White House could have a detrimental impact on global trade if he sees through his promise to “put America first”. And eurozone countries continue to face numerous risks, including the possibility of a ‘no’ vote in Sunday’s Italian referendum on political reforms. That result could trigger the resignation of Italy’s Prime Minister Matteo Renzi and plunge the country into further economic instability.

The Guardian article

Covering the basesIn light of this outlook, the BoE stress tested for a number of scenarios, as reported by the BBC. In the UK, it considered a 31% fall in house prices, a 4.3% fall in GDP and a 9.5% rise in unemployment. Globally, it modelled a fall in GDP to -2%, a 3% fall in US and eurozone GDP, China entering recession with - 0.5% growth and a drop in oil prices to $20 a barrel. 

Against that backdrop, for all but three of the big banks to have cleared the toughest hurdles yet and for two of those three to have only just failed suggests the sector’s financial health is gaining strength. It’s unfortunate, then, that so much of the reporting was so downbeat.

BBC article
 
 
Seen a blog, news story or discussion online that you think might interest CISI members? Email jules.gray@wardour.co.uk.nd Standard Chartered 0.2%.
Published: 02 Dec 2016
Categories:
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  • The Review
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