Friday, September 22, 2023

All major British banks pass the Bank of England stress test

The eight main banks of United Kingdom have passed the stress tests to which they have been subjected by the Bank of England, which considers that all entities have proven to be resistant to a severe stress scenario, so no entity should strengthen its equity position.

The test results indicate that no individual or group level bank would fall below its leverage ratio CET1 or Tier 1 on a transitional basis under IFRS 9 after taking strategic management measures, the entity has announced, adding that “no bank is required to strengthen its capital position as a result of the test.”

“This indicates that the major UK banks would be able to withstand the severe macroeconomic stress in this scenario, while at the same time having the capacity to support UK households and businesses during the stress,” he added.

The test to which the bank of england has submitted to NatWest, HSBC, Barclays, Standard Chartered, Lloyds, Santander, Nationwide and Virgin Money contemplated an even more severe scenario than that registered during the global financial crisis of 2008, as highlighted by the institution.

The results of the stress test indicate that, in the scenario, all banks and corporations mortgage credit Participants are held above their common leverage ratio Tier 1 (CET1) minimum rates of return and no banks are required to strengthen their capital position as a result of the test.

In fact, the institution has highlighted that the aggregate capital reduction it is less than in the 2019 stress test, despite the fact that the general severity of the proposed scenario is quite similar.

Overall, banks’ capital ratios remain well above the minimum critical rate of aggregate CET1 in a stress scenario, going from an initial aggregate CET1 ratio of 14.2% to a minimum of 10.8% in the first year of the stress situation, compared to a global critical situation rate of 6.9%.

Likewise, the aggregate leverage ratio falls from an initial point of 5.3% to a low point of 4.7% against a critical rate of 3.5%.

“At the point where the CET1 ratios of the banks are lowest, the CET1 ratios of the eight banks are, together, more than double the level prior to the global financial crisis from 2007-08″, has stressed the Bank of England.

As such, UK banks’ aggregate CET1 capital and Tier 1 leverage ratios remain above aggregate floor rates by 3.8 percentage points and 1.2 percentage points, respectively, at capital low points.

In addition, the institution has pointed out that the examination has taken into account the banks’ balance sheets as of June 2022, while, since then, the capital ratios of the main UK banks have increased, since the CET1 capital ratio aggregate was 14.6% in the first quarter of 2023.

A key difference from previous stress tests was that the assumed inflation in the UK it averaged around 11% over the first three years of the scenario, peaking at 17%, causing a 13% drop in real household income and a response from the monetary politics stronger, with interest rates rising to 6%, while UK GDP fell 5%, unemployment climbed to 8.5% and house prices plunged 31%.

Similarly, the UK’s main trading partners would also experience shocks similar in the adverse scenario, as real GDP declined for all of the UK’s major trading partners, and the global economy contracted by 2.5% in the first year of the scenario, while global interest rates peaked at 4.7 % for the European Central Bank deposit facility and 6.5% for the United States effective federal funds rate.


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