The results of the UK’s bank stress tests are now out.
The Co-operative Bank, Royal Bank of Scotland and Lloyds were all told that they need to strengthen their capital. The Co-op Bank also has to submit a new capital plan, meaning it failed the tests entirely.
The stress tests were widely considered to be more strict than the European ones that were conducted earlier this year. The tests take the bank’s performance details and subject it to an imaginary economic crisis to see how it performs: A one-third crash in house prices and a doubling in unemployment was part of the model.
A bank should keep its capital ratio (a common measure of how much more of a shock a bank can take) above 4.5% even during the worst part of the stress test. All but one bank (the Co-op) managed to do that, though RBS squeaked through with just 4.6%.
Overall, they Financial Policy Committee (FPC) that was in charge of the tests sounds pleased:
Overall, the FPC judged that the resilience of the system had improved significantly since the capital shortfall exercise in 2013. Moreover, the stress-test results and banks’ capital plans, taken together, indicated that the banking system would have the capacity to maintain its core functions in a stress scenario. Therefore, the FPC judged that no system-wide, macroprudential actions were needed in response to the stress test.
The Co-op was widely expected to fail the tests, so no major surprises here. The bank has bounced from crisis to crisis, after pulling out of a plan to buy hundreds of branches from Lloyds in 2013. A huge capital shortfall and the dismal corporate governance of the bank were revealed shortly afterwards.
Here’s how the BoE’s scenario was different to Europe’s, according to Capital Economics: