UK banks have passed the latest round of stress testing by the Bank of England that assess the ability of banks to weather adverse financial conditions.
The tests were introduced in the wake of the financial crisis to help prevent the collapse of leading financial institutions during periods of extreme stress. The scenarios tested for are more severe than those experienced during the 2007/08 crisis.
Banks are required to hold certain levels of capital buffers set out by the Bank of England and are regularly tested for shocks to the economy.
“The Bank of England’s latest stress test has shown the UK’s main lenders will be able to stomach worsening economic conditions. This includes the effects of weakening commercial real estate prices, recessions, higher rates and inflation,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
“The tests come as a relief during a time that’s been marred by anxiety about regional banking failures in the US as interest rates have shot up in many major economies. A combination of strong balance sheets, healthy asset-classes and a stricter regulatory environment mean the UK’s financial giants also have more room to help customers if things get tougher, including changing the terms of loans if needed.”
Banking shares were among the top risers on Wednesday morning, with shares in Lloyds and Barclays up 2.3% and 1.7%, respectively.
Lloyds said in a statement:
“The Group is pleased to note that it has comfortably passed the stress test and given this strong performance, the Group is not required to take any capital actions. The BoE calculated the Group’s transitional CET1 ratio after the application of management actions as 11.6 per cent and its leverage ratio as 4.5 per cent. Despite the severity of the stress test scenario, and without the conversion of the Group’s AT1 securities into equity, the Group significantly exceeded the capital and leverage hurdle rates of 6.6 per cent and 3.5 per cent respectively.”