UPDATE: UK Banks Pass Europe-Wide Stress Test

(Adds details.) By Patricia Kowsmann Of DOW JONES NEWSWIRES LONDON (Dow Jones)--The U.K.'s four banks that underwent a Europe-wide stress test on their balance sheets have passed, the country's financial regulator said late Friday. Barclays PLC (BCS), HSBC Holdings PLC (HBC), Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC (LYG) all recorded Tier 1 capital ratios above 9% for a deeply stressed scenario at Dec. 31, 2011, that among other things accounts for severe government bond shocks and a recession this year and the next. The minimum requirement necessary for banks to pass is a 6% Tier 1 ratio--a measure of a bank's capital adequacy, consisting of equity, preferred shares and retained earnings. Under the severe stressed scenario--whose probability of happening was estimated at less than 5%--HSBC would have a Tier 1 ratio of 10.2%, lower than the 10.8% ratio as of Dec. 31, 2009 but still far higher than the 6% minimum. EU regulators said the 6% figure is the same used in the U.S.' stress tests. European regulation currently requires banks to have a minimum 4% ratio. Barclays, meanwhile, would see its Tier 1 ratio rising to 13.7%, from 13%. RBS' would decline to 11.2% from 14.4% at Dec. 31, 2009. Lloyds would go to 9.2% from 9.6% as of the end of last year. Asia-focused Standard Chartered PLC (STAN.LN) wasn't tested, although a person familiar with the situation said the bank constantly performs its own evaluations. "The exercise shows that the U.K. banks are well placed to handle further periods of economic stress, as outlined in the macro economic parameters detailed by CEBS, should such stress develop," the FSA said in a statement. The results were widely expected, and underscore how U.K.'s banking system has strengthened since the financial crisis, which saw two of its largest banks--Lloyds and RBS--being rescued by the state. Since then, both banks have been improving their capital position by selling assets and raising money, including through the largest rights issue in U.K. history in the case of Lloyds. The stress test, carried out by the European Union's Committee of European Banking Supervisors, or CEBS, examined the banks' balance sheets, compliance with capital rules and how their exposure to the sovereign debt of 30 European countries would affect them in certain scenarios. Most of the 91 banks that participated in the exercise have passed, with the exception of some banks in Spain, Greece and Germany. Analysts, however, warned that the high approval rate could be the result of lighter stress scenarios designed by the regulators, who hoped that results would settle uncertainties over the health of Europe's banks following Greece's debt crisis. For instance, none of the three scenarios under the test assume sovereign-debt defaults. While analysts say U.K. banks aren't at risk of having to raise more capital, the issue of their access to funding from still-stressed wholesale markets remains a concern. "The real test will be on whether debt capital markets will be convinced by this exercise," said Oriel Securities analyst Mike Trippitt, adding that any skepticism could lead to higher borrowing costs for financial institutions. In the U.K., banks are already facing big debt refinancing issues over the next years. According to the Bank of England, they will need to refinance or replace GBP750 billion to GBP800 billion of loans and liquid assets by the end of 2012, with over GBP250 billion falling due next year. With the euro zone's debt crisis and capital markets shut at least for now, raising debt hasn't been easy. So far this year, banks on average have been borrowing GBP12 billion a month, far less than the GBP25 billion the Bank of England said they must raise. -By Patricia Kowsmann, Dow Jones Newswires. Tel +44(0)207-842-9295, patricia.kowsmann@dowjones.com (END) Dow Jones Newswires July 23, 2010 13:14 ET (17:14 GMT)