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Co-op bank fails latest stress tests

RBS and Lloyds just able to withstand another shock

Mark CarneyRoyal Bank of Scotland and Lloyds just managed to survive the latest tests on their ability to survive another big financial shock to the system.

Both banks said they took action to rebuild their balance sheets ahead of the Bank of England’s stress testing of the sector.

The results unveiled today reveal that all Britain’s big banks except the Cooperative Bank could withstand a collapse in the system similar to that in 2007-09 when £66 billion of taxpayers money was used to prop up RBS and Lloyds.

The BoE’s Financial Policy Committee measures potential risks in the economy from weakness in the banking system and checks that they have sufficient capital reserves.

The FPC said the tests showed that Britain’s banking system did not require any further support.

“The results show that the core of the banking system is significantly more resilient (and) that it has the strength to continue to serve the real economy even in a severe stress,” said BoE Governor Mark Carney (pictured).

The BoE added further tests to those applied by European regulators who reviewed 123 banks in October.

The Bank’s assesses the banks’ abilities to withstand a slump in the value of sterling and a build up of inflationary pressures, leading to a tightening of monetary policy and a rise in interest rates to 4%. Economic output falls by about 3.5% and the unemployment rate doubles to 12 percent. In this scenario house prices  fall by 35% and commercial property prices by 30%.

The test requires the eight biggest lenders to have a core capital ratio of at least 4.5% of risk-weighted assets to cope with these circumstances.

Co-op, which nearly collapsed last year and fell under the control of bondholders after a 1.5 billion pound capital shortfall was identified, had already warned it might fail the test.

The stress test showed that Co-op’s core capital ratio would sink to -2.6%, even after taking previously announced measures. RBS and Lloyds’s ratios would fall to 5.2% and 5.3% respectively.

The Bank said it “would ordinarily have required RBS to submit a revised capital plan”, but that it deemed this unnecessary as RBS had announced it would raise extra capital while the stress tests were under way.

Barclays scored 7.5%, HSBC 8.7%, Nationwide Building Society 6.7%, Santander 7.9%and Standard Chartered 8.1%.

The Bank said that this year’s stress test scenario was tougher on banks with high exposures to British mortgages, such as RBS, Lloyds and Nationwide.

Ewen Stevenson, chief financial officer at RBS, said “We have made good progress during 2014 in both strengthening our capital ratios and reducing higher risk exposures.

“However, we recognise that there is still much work to be done to improve the resilience of our balance sheet. Having regard for further potential conduct and litigation settlements and redress, we remain on track to reach our common equity tier one capital ratio targets of 11% by end 2015 and at least 12% by end 2016.”

Lloyds group chief executive, António Horta-Osório said: “We are pleased to have exceeded the PRA stress test threshold under a severe UK-focused assessment. These results are a clear demonstration of the progress the Group has made over the first two full years of our strategic plan, which was announced in June 2011.

“The stress test was based on our balance sheet as at the end of 2013 and since then we have made further significant progress in strengthening our capital position and delivering on our strategy.”

Niall Booker, chief executive of the Co-operative Bank, said: “The bank is much stronger than a year ago.  As the regulator notes today, we have achieved the target of building our capital base and the actions we have taken during the first year of our business plan have made the Bank more secure for the benefit of all stakeholders.”

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