BOE Passes Banks on Stress Tests But Raises Capital Bar

BOE to Raise Capital Buffer as Banks Pass Stress Tests

(Bloomberg) --

The Bank of England plans to lift a key capital demand for the biggest U.K. lenders, even as it said the banks can weather a financial crisis.

The central bank said it will raise the buffer, which is designed to release funds if conditions deteriorate, to 2% from 1%. However, other tweaks to the capital rules mean banks will only need to increase the highest-quality capital, known as Tier 1, to about 14% from 13.7%, according to the BOE’s Financial Stability Report released on Monday.

The U.K.’s seven largest lenders also all passed the central bank’s latest stress test, showing they’re strong enough to continue lending even in a global downturn or in the event Britain leaves the European Union next year without a trade agreement.

“The resilience of U.K. lenders is confirmed as high, but we should also consider that it has become more and more difficult to design extreme scenarios,” said Angela Gallo, a finance lecturer at Cass Business School in London.

The 2019 scenario for the global economy “was sufficiently severe to encompass economic risks from both broader trade war and tensions in Hong Kong. Major U.K. banks were resilient to the stress scenario, and so will be able to continue to lend,” the report said.

The exam, designed to be tougher than the 2008 financial crisis, gauged banks against a 4.7% decline in U.K. economic output in a year, the BOE’s benchmark interest rate rising to 4% from the current 0.75%, and the unemployment rate climbing to 9.2%.

Barclays Plc, Standard Chartered Plc, Royal Bank of Scotland Group Plc, HSBC Holdings Plc, Nationwide Building Society and Lloyds Banking Group Plc said the stress tests confirmed their financial strength. The BOE also tested Santander UK Group Holdings Plc.

“We expect U.K. banks’ capital ratios to remain stable over the next 12-18 months, as banks will likely offset lower organic capital generation by reducing their shareholder distributions,” said Edoardo Calandro at Moody’s Investors Service.

The changes to the countercyclical buffer will come into force in one year. The BOE said the alteration would allow banks to absorb as much as 23 billion pounds ($30.7 billion) more in losses in a downturn before they needed to cut lending.

The central bank said raising the bar now would give them more freedom to change the rate gradually in times of stress.

Other highlights from the report include:

  • The BOE and Financial Conduct Authority recommended tightening the rules on open-ended funds
  • It recommended maintaining standards on mortgage lending
  • Said payment chains that use stablecoins -- digital currencies whose value is pegged to another asset -- should be regulated to standards equivalent to traditional payment chains
  • Reiterated that banks need to be ready for Libor ceasing to exist from 2021

--With assistance from Viren Vaghela.

To contact the reporter on this story: Silla Brush in London at

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at, Marion Dakers, Keith Campbell

©2019 Bloomberg L.P.