LONDON (Alliance News) - Annual stress tests showed that Royal Bank of Scotland Group PLC and Standard Chartered PLC had capital inadequacies at the end of 2014, but both lenders have done enough since that stage to earn a reprieve from the Bank of England, which said the overall results showed the UK banking system would be able to continue lending in the event of a severe global downturn.
None of the seven banks subjected the stress test was required to submit revised capital plans, and the central bank's Financial Policy Committee said that a continued improvement in capital levels across the system during 2015 suggested that UK banks would be more resilient to macroeconomic stress in the future.
The stress tests did not show capital inadequacies for Barclays PLC, HSBC Holdings PLC, Lloyds Banking Group PLC, Nationwide Building Society, or Santander UK, based on their 2014-end balance sheets.
The reassurance provided by the Bank of England lifted bank shares Tuesday. Barclays was the best performing FTSE 100 stock near the close, up 5.0%, while RBS was up 3.0%, Lloyds up 2.2%, and HSBC up 1.9%. Standard Chartered was trading flat.
Regularly assessing the banking system's resilience to stress has become a critical tool for regulators in the wake of the global financial crisis of 2008-09. It is designed to check whether or not the UK's seven major banks, which are overwhelmingly the biggest lenders to the UK economy, carry enough capital to cope in a crisis.
Following the inaugural round of stress testing this time last year, which focused on stress in the UK household sector, the second round was based on a hypothetical scenario in which a big slowdown in China and the rest of the world is accompanied by plunging commodity prices, sustained deflation in the eurozone, and heightened volatility in financial markets.
Separately, banks were tested for their ability to withstand GBP40.0 billion in fines for past misconduct. Critically, the banks were restricted from protecting their capital levels by cutting credit supply to UK businesses and individuals.
All seven banks at least met the 4.5% common equity tier one and 3.0% leverage ratio hurdles in the hypothetical stress scenario, following dividend cuts and management actions. No additional tier one instruments, which have the potential to turn into equity in times of severe stress, were triggered under the test for banks that had already issued them by the end of 2014.
However, RBS failed to meet its individual capital guidance in the stress, although the sale of Citizens Financial Group, a US retail bank, and the issuance of additional tier one securities has enabled the state-backed lender to strengthen since that time, thereby avoiding the embarrassment of being forced to submit a revised capital plan.
Standard Chartered, which has been hit by rising impairment charges in India and China, was unable to meet its tier one minimum capital requirement of 6%, but was not required to submit a revised capital plan thanks to a strategic review carried out by Chief Executive Bill Winters, who has slashed dividends, set out targets to reduce risk-weighted assets and costs, and set a USD5.1 billion rights issue of shares in motion.
"The results of the test demonstrate our resilience to a marked slowdown across the key markets in which we operate. The test was conducted on our balance sheet as at the end of 2014. Since then we have made further significant progress in strengthening our capital position. We are operating at capital levels above current minimum regulatory requirements and have a number of additional levers at our disposal to further manage capital," Winters said in a statement.
The other bank to make most of its money in Asia, Africa and the Middle East is HSBC. The stress test had been viewed as an opportunity for the lender to soothe investor concerns about its Asian credit quality. HSBC's common equity tier one ratio of 7.7% was bettered only by the 9.5% posted by Lloyds among the banks whose shares trade in London, following management actions such as cutting costs or selling assets.
Barclays, whose large investment banking operations were exposed to the so-called traded risk stress of the latest health check, posted a 7.3% CET1 ratio. Elements of the traded risk stress include market risk in areas such as price risk of derivatives and securities, counterparty credit risk, and risk to investment banking revenue. Projected traded risk losses amounted to GBP7.8 billion for Barclays, second only to the GBP11.5 billion for HSBC, which also has a sizeable investment bank.
Separately, the Bank of England's Financial Policy Committee said it is considering the use of a tool known as a countercylical capital buffer, which is used to help banks withstand shocks and continue lending to the real economy.
"The shift in financial conditions out of the post-crisis phase means that the FPC is now actively considering the appropriate setting of the countercyclical capital buffer," Governor Mark Carney said Tuesday.
The FPC intends to set the countercyclical buffer above zero before risk levels become elevated. The FPC is expected to begin raising the buffer, currently at zero, in March. It currently expects the countercyclical capital buffer to be in the region of 1.0% of risk-weighted assets, and will move to that level in a gradual manner. Setting the buffer at 1.0% would be equivalent to GBP10.0 billion of capital across the system.
"As a first step in setting the buffer, we intend to separate those risks currently captured by existing supervisory requirements that will in future be captured by the countercyclical capital buffer. To this end, the PRA Board has agreed to review individual firms' buffer requirements in the first quarter of next year," Carney said.
"This one-off process will increase the counter-cyclical buffer from zero but will not, in itself, change the overall capital requirements for UK banks," Carney added.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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Barclays (BARC)
Lloyds (LLOY)
HSBC Holdings (HSBA)
Standard Chartered (STAN)
