UK lenders prove resilient in Bank of England stress test
Lloyds came closest to breaching the capital floor in the test.
By Tom Metcalf and Harry Wilson, Bloomberg
13 Dec 2021 20:53
A pedestrian passes an entrance at the Bank of England in the City of London. Image: Bloomberg
The Bank of England said the UK’s eight largest lenders all passed its latest stress test, concluding they can weather a double-dip recession and Covid-19 societal adjustments that last for years.
The firms would have enough capital to continue lending through a severe shock to the economy, according to the results released on Monday. Failing loans would pull capital levels down to an aggregate 10.5%, comfortably above the 7.6% the BOE used as a minimum, according to the Financial Stability Report published Monday.
The BOE’s Financial Policy Committee “continues to judge that the U.K. banking system remains resilient to outcomes for the economy that are much more severe” than central bank forecasts, the report said.
Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc, Nationwide Building Society, NatWest Group Plc, Banco Santander SA’s British arm, Standard Chartered Plc and Virgin Money UK Plc were tested by the BOE. They account for around three quarters of all lending to the U.K. real economy.
Lloyds came closest to breaching the capital floor in the test, reaching 7.8% compared to the BOE’s 7.7% so-called reference rate set for the bank.
“Aggregate impairment rates are relatively high for those banks that are more active in unsecured and corporate lending, since mortgage losses are estimated to be relatively low in this scenario,” the report stated.
The test assessed how the balance sheets of lenders at the end of 2020 would cope with the U.K.’s gross domestic product contracting around 37% between 2020 and 2022, unemployment peaking at around 12% and residential and commercial property falling by around a third.
Last year’s stress test was skipped by the BOE, which instead analyzed the resilience of Britain’s banking industry to the unfolding economic ructions caused by the pandemic. Like other central banks around the world, the BOE told banks to halt their dividends to build up their capital reserves in 2020 before lifting the restrictions.