The Bank of England is to impose a series of tests on major UK banks to establish whether they are able to withstand a dramatic slowdown in China, a contraction in the eurozone, the worse deflation since the 1930s along with a fall in UK interest rates to zero.
The Co-operative bank – which failed last year’s tests – is no longer included in the annual assessments of the industry’s financial strength as it is too small, leaving six banks and the Nationwide building society to be tested.
The banks are Barclays, HSBC, Santander UK, Standard Chartered and the two bailed-out banks, Lloyds Banking Group and Royal Bank of Scotland.
Developed after talks with the International Monetary Fund, the BoE is switching its focus to international events rather than the domestic ones used in 2014. Last year’s tests were designed to meet those imposed by the pan-European banking regulator, the European Banking Authority, which is not conducting tests this year.
The City is expecting this year’s tests to particularly assess the strength of HSBC and Standard Chartered, although a scenario for the UK is included, under which inflation is negative for seven consecutive quarters – the largest fall in prices for 80 years – and the bank rate cut to zero from the 0.5% level at which it has been stuck since the banking crisis.
Banks are being asked to test their ability to withstand shocks over a five-year period to the end of 2019 and be expected to maintain a minimum amount of capital and meet a leverage ratio – a tougher measure of financial strength – while ensuring lending to the real economy grows 10% over the five-year period.
Full article: Bank of England stress tests to include feared global crash (The Guardian)