Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC barely passed stress tests set by the Bank of England (BOE), which said their capital at the end of last year fell short of requirements.
The two lenders “remain susceptible to a severe economic downturn,” the BOE said in a report yesterday.
Hypothetical losses in the test lowered RBS’ core capital to 4.6 percent, based on data at the end of last year, just above the 4.5 percent pass threshold. Capital at Lloyds came in at 5 percent. Co-operative Bank failed the assessment, ending up at minus 2.6 percent.
The UK’s eight biggest banks were examined on their resilience to a range of shocks, such as a 12 percent unemployment rate, a BOE benchmark interest rate of 4 percent and house prices falling by a third.
The BOE said that both Lloyds and RBS, part-owned by the UK government, took actions this year to address the shortage of capital and do not have to submit new plans to bolster resilience.
In contrast, Co-operative Bank was required to submit a new plan to shrink its balance sheet, which was accepted by the Prudential Regulation Authority.
All other banks passed, with HSBC Holdings PLC getting the highest core capital ratio, at 8.7 percent in the assessment. Barclays PLC ended the exams with 7 percent, Santander UK and Standard Chartered PLC had 7.6 percent and 7.1 percent respectively. Nationwide Building Society had 6.1 percent.
“This was a demanding test,” BOE Governor Mark Carney said in a statement. “The results show 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.”
The test of banks was published alongside the BOE’s semi-annual Financial Stability Report, which provides an overview of the strength of the financial system.
In the report, the BOE said the global economic outlook has weakened since June and concerns about geopolitical risk have increased.
It said these could undermine financial stability if a “shift in global risk appetite triggers sharp adjustments in financial markets and undermines business and household confidence.”
The BOE also highlighted a risk to stability from the drop in oil prices this year.
While the decline does not pose an immediate threat, it could affect the ability of some companies, such as US shale oil and gas exploration firms, to service their debt and “could affect market sentiment more broadly,” it said.
“There are also geopolitical risks associated with a continued drop in oil prices, it said.
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