And finally....Today’s stress tests showed that UK banks are better capitalised to ride out the next crisis.
But should they put that capital to better use?
Accenture’s managing director, Finance & Risk, Peter Beardshaw, argues that they should be more innovative:
“Banks have come a long way since the crisis and are showing themselves to be more robust when tested against a comprehensive set of scenarios. It’s not just their capital buffers, banks have also heavily invested in being ready for upcoming ring-fencing, MiFID II and PSD2 regulation. So if banks are showing regulators they have a more robust structure, should they now be encouraged to unlock some of that capital and inject it into the economy? Doing so could mean further lending to SMEs or more digital investment for innovating for their customers, and improving their operational resilience.
“Overall, while banks may be better placed to face problems from the past, they must also be ready for risks of the future. Banks will need to show their resilience when it comes to technology and digital disruption on the horizon, especially as the threat of cybercrime increases and banks get ready for data protection laws.”
That’s all for today. Thanks for reading and commenting. GW
The Guardian’s latest Brexit dashboard is out! And it suggests that the UK’s economy picked up a little this month.
My colleague Richard Partington explains:
The country has kept on an even keel as exporters were bolstered by growth in global trade, while the improvement in the outlook for the rest of the world is helping to offset weakness at home.
Households continue to feel the squeeze from inflation, prompted by the weak pound since the Brexit vote, but the rate at which prices rose in the UK stayed at 3% despite expectations of a further increase. Still, questions remain over the UK’s future trading relationship with Europe, while Philip Hammond’s budget revealed a forecast for a slowdown in economic growth for the years to come.
Here’s the full report:
These key charts provide more details:
PwC’s Andrew Sentance and Dartmouth College professor David Blanchflower have given their verdict:
James Hurley of The Times has spotted an interesting new line in the FCA’s report into Royal Bank of Scotland:
Telling addition to updated summary of FCA's findings over GRG. 5,900 SME cases went through the unit during review period. So, RBS became a shadow director in more than 200 SME cases. And about 1600 cases will have showed inappropriate actions regarding SME asset valuations. pic.twitter.com/hg2HFWj1Nf
— James Hurley (@jameshurley) November 28, 2017
The news that Britain’s banks could survive a hard Brexit (as long as it didn’t coincide with a wider economic crisis) will have been welcomed by the UK government, as it heads towards a crucial EU summit in December.
But any relief should be tempered by the Bank of England’s warning that the City needs a transition deal of at least two years, with no time to lose.
Simon Morris, a financial services partner with law firm CMS, says Mark Carney is quite right to warn against a disorderly Brexit.
“The Bank of England’s repeated warnings that a shambolic Brexit stands to damage the UK financial system highlights the need for early Government agreement on the new regulatory landscape plus a proper transition period to adapt to it.
Firms need every minute of three years, and not just the 70 weeks left in the Article 50 notice period, to plan around the greatest disruption to the established financial system since the outbreak of war in 1939.”
Elsewhere in the City, hedge funds who bet against online grocery firm Ocado are nursing burned fingers today.
Shares in Ocado have surged by over 20% today, after it announced it had secured a deal French retailer Groupe Casino.
Under the agreement, Casino will build a new “state-of-the-art automated warehouse” based on Ocado’s technology.
Ocado has long been promising that it was working on a major overseas deal with a European retailer. But it has become one of the most ‘shorted’ stocks in the City, with speculators betting that it wouldn’t deliver the goods....
Ocado shares jump more than 20% after e-commerce deal with French retailer Casino. pic.twitter.com/c2mu8PcBmj
— Peter Hoskins (@PeterHoskinsTV) November 28, 2017
Ocado shorts getting burned today. Short interest at around 22% (says CS), one of most heavily shorted stocks in the UK
— Carolin Roth (@CarolinCNBC) November 28, 2017
Lloyds Banking Group are now the biggest faller on the FTSE 100, down 2.7% at 63.8p, despite passing today’s stress tests.
Barclays are also lagging, down 1.7%, having struggled in the stress tests. Other banks are having a better day, with HSBC up almost 1%.
David Madden of CMC Markets says bank shares are a mixed bunch today:
Despite been given a clean bill of health, Lloyds, RBS and Barclays are in the red, while HSBC and Standard Chartered are in positive territory. Barclays and RBS were cited as the weakest of the bunch.
BoE chief Mark Carney stated the UK banking system can withstand the UK leaving the EU, but a ‘disorderly’ and ‘sharp’ Brexit could be costly. HSBC and Standard Chartered have far more exposure to emerging markets than they do to Europe, which is helping the share price this morning.
Updated
City analysts are now giving their verdict on today’s UK bank stress tests.
Rob James, co-manager of the Old Mutual Contingent Capital Fund, is impressed that Britain’s financial sector can stomach losses of £50bn if the economy takes a sharp dive.
He writes:
What is deeply reassuring about this year’s test... is that every bank passed. So in answer to that perennial question, “Are we nearly there yet?” this time the response is a resounding, “yes”.
The implication is that our banking system can now absorb catastrophic losses, including the continuation of litigation and conduct fines, and still be in a position to supply credit to the economy during the stress.
Joe Dickerson, equity analyst at Jefferies, says shareholders shouldn’t expect any big windfalls from the banks, though.
Our conclusion is that investors expecting near-term capital distribution from Standard Chartered and Barclays may be disappointed and for Lloyds...investors shouldn’t be heroic about large special distributions in 2018-19.
William Anderson Jones, Head of UK Corporate Dealing at RationalFX, says the stress tests should reassure investors.
“UK banks have proven that they would be able to withstand a disorderly Brexit, as results of recent stress tests have shown today. BoE Governor Mark Carney confirmed that all of Britain’s biggest banks were able to pass their most rigorous examination yet, testing their ability to withstand a financial crisis.
The resilience of the banking system will prove a reassurance to investors, as the outcome of Brexit remains unclear. The pound has shown little reaction, remaining mostly steady after reaching an eight-week high against the dollar yesterday.
OECD: UK faces Brexit slowdown
Good news! The global economy is picking up momentum, thanks to a “broad-based and synchronised improvement in growth rates”.
That’s according to the OECD’s latest economic outlook. It predicts the global economy will grow by 3.6% this year, 3.7% in 2018 and 3.6% in 2019
But there’s bad news too -- Britain will lag behind other major economies over the next few years.
The OECD says:
In the United Kingdom, the growth slowdown is expected to continue through 2018, due to continuing uncertainty over the outcome of negotiations around the decision to leave the European Union and the impact of higher inflation on household purchasing power.
So the OECD expects UK GDP to rise by 1.5% this year (down from 1.6% previously).
Growth will then slow to 1.2% in 2018 (up from 1% before), and then 1.1% in 2019.
In contrast, the eurozone is expected to grow by 2.4% in 2017, 2.1% in 2018, and 1.9% in 2019.
Updated
FCA releases final summary of RBS report
Today is a very busy day for UK banking journalists, as they chew through the Bank of England’s stress tests and financial stability report. These are detailed documents that deserve proper analysis.
And yet... the Financial Conduct Authority, Britain’s City watchdog, has decided to publish the final summary of its report into how small business owners were mistreated by Royal Bank of Scotland.
This report was commissioned in 2014, and finished in October 2016. The FCA has been under pressure to publish it, following allegations that RBS had put struggling businesses into its Global Restructuring Group and then deliberately mistreated them.
I can’t imagine why they thought this would be a good day to release it, though....
Really @TheFCA? Publishing the @RBS GRG final summary on the same morning as literally ALL the banking reporters are up to their eyes with @bankofengland stress tests and FSR?
— caroline binham (@carolinebinham) November 28, 2017
Pretty cynical timing from @theFCA. It's published its final summary of the RBS GRG "independent review" on the same day banking reporters are up to their eyes reporting BoE stress tests https://t.co/XArtA5vtOW
— Ian Fraser (@Ian_Fraser) November 28, 2017
Anyway, the final summary is online here.
The inquiry has found that Royal Bank of Scotland was guilty of “widespread inappropriate treatment of SME customers”. It says the bank failed to support small businesses to recover, and was too focused on raising fees to cut its own debts. RBS also failed to handle complaints properly.
Some of those failings were “systemic”, as RBS failed to manage the” conflicts of interest inherent in GRG’s twin objectives” (ie, helping distressed businesses, and recovering the money they owed RBS).
But, the inquiry didn’t accept that RBS had deliberately tried to drive firms into its GRG division so they could be pillaged.
So, is this the end of the matter?
Possibly not, judging by this enigmatic line in the report:
The FCA has been conducting a general investigation into matters contained in the report which we announced in November 2016. We have now decided to carry out a more focussed investigation.
Updated
AP: UK banks could handle hard Brexit.
Here’s the Associated Press’s take:
Britain’s biggest banks can withstand a series of economic shocks including a no-deal Brexit that would have more severe impacts than what they experienced during the global financial crisis, the Bank of England said on Tuesday.
While concluding that lenders can deal with Britain crashing out of the European Union without a deal and restrictions imposed on British business, the Bank of England warned that additional problems may emerge if a “disorderly” Brexit takes place at the same time as a sharp global recession.
In its annual stress test of the sector, the central bank said the country’s biggest lenders, such as Barclays and Lloyds Bank, were “resilient” to a raft of adverse scenarios, including deep simultaneous recessions at home and abroad and hefty falls in the price of assets.
Bank of England Governor Mark Carney said:
“Despite the severity of the tests, for the first time since the bank began stress testing in 2014, no bank needs to strengthen its capital position as a result.”
Santander UK say they’re pleased with the stress test results:
Once again, Santander UK had the lowest stressed CET1 ratio impact of all participating firms, demonstrating our resilient balance sheet and low risk profile.
[CET1 = Common Equity Tier 1, a measure of a bank’s financial strength]
Twitter have collated the best tweets about today’s stress test results:
The @bankofengland modelled an economy with high unemployment and interest rates and found that all major lenders passed its stress tests.https://t.co/7GAbFdoQnc
— Moments UK & Ireland (@UKMoments) November 28, 2017
Bank Stress Tests: What the papers say
Our City editor Jill Treanor reports that today’s stress tests showed that the UK banking sector could survive a bad Brexit outcome:
High street banks can withstand a disorderly Brexit, the Bank of England has said, even though Royal Bank of Scotland and Barclays struggled in its latest health check on the sector.
For the first time since 2014, when Threadneedle Street conducted its first annual stress tests, the major lenders have not been required by the UK central bank to raise billions of pounds more of capital to strengthen their finances.
But RBS, 70%-owned by the taxpayer, and Barclays only passed the hurdle rate set by the Bank because the regulator took account of efforts they had already made to increase their financial strength since the end of last year, when the tests were applied.
The Bank of England is alert to the risks poised by Brexit, and in its half-yearly review of risks to the financial system warns that a disorderly Brexit coupled with a severe global recession and more multibillion pound fines from global regulators could force it to reconsider its assessment.
Guardian: High street banks ‘can cope with disorderly Brexit’
The Times’s Katherine Griffiths points out that this year’s tests were pretty tough:
Britain’s big banks can withstand a hard Brexit and still keep lending but Barclays and Royal Bank of Scotland struggled to pass the Bank of England’s latest stress tests.
The seven biggest lenders passed a stress test that was as tough as if the UK crashed out of the European Union, the Bank said, with sterling slumping, interest rates rising to 4 per cent and a record housing crash.
All seven lenders passed but Barclays and Royal Bank of Scotland struggled. Barclays emerged with the smallest headroom.
The Times: Big banks can cope with hard Brexit
Over in the FT, Caroline Binham and Martin Arnold flag up that the BoE is making banks strengthen their financial positions:
The Bank of England is forcing UK banks to hold an extra £6bn in capital to guard against risks beyond that of Brexit, as it called on the UK and the European Union to introduce legislation to avoid a post-Brexit crisis in derivatives and insurance markets.
The BoE said on Tuesday that it is raising a special buffer half a percentage point, to 1 per cent, to lock in capital that banks are currently holding voluntarily. The aim is for lenders to better withstand against “material” macroeconomic risks beyond Brexit, such as global debt levels, asset valuations and misconduct costs.
The buffer could raise again next year, the central bank warned. A disorderly Brexit is unlikely, the BoE forecasts.
Financial Times: BoE demands extra £6bn buffer from banks; calls for new post-Brexit derivatives rules
Iain Withers of the Daily Telegraph points out that shareholders would suffer if the banks incurred hefty losses.
The report showed that in the stress test scenario all but Nationwide would stop paying out a dividend within three years, and the building society would pay out just £100m.
While this year’s stress test did not explicitly model a ‘hard Brexit’ scenario, the Bank said it was sufficiently severe to give it confidence the UK’s financial system would keep lending to the real economy even in a disorderly exit from the EU.
However the report warned politicians on both sides of the Channel to take several important actions to reduce the risks from Brexit, including agreeing a swift transition period and passing legislation to resolve potential contractual conflicts on trillions of pounds of derivative contracts.
Telegraph: UK banks can weather chaotic Brexit but RBS and Barclays in worst shape, says Bank of England
Updated
The press conference wraps up with another warning from Mark Carney that a no-deal Brexit would be undesirable for everyone involved.
Q: Is the Bank of England concerned about the row at the London Stock Exchange over its leadership?
Mark Carney replies that the LSE plays an important role in UK financial stability. Its CEO Xavier Rolet has made an “extraordinary contribution....but everything comes to an end”.
Carney says he’s “a bit mystified” by the row over Rolet’s succession.
[Explainer: Rolet’s departure was announced last month. It has since emerged that he had been asked to step down by the board, after falling out with chairman Donald Brydon.
Activist investor the Children’s Investment Fund is now demanding that Brydon leaves, and Rolet stays on #developing #popcorn]
Q: Are UK banks being too complacent about the impact of Fintech, by assuming they can cut costs while maintaining market share?
That’s the challenge, Carney replies.
UK banks are assuming that they can use new technology to bring down the cost of acquiring new customers.
From next year, it will be easier for customers to shift accounts. And that could mean that some banks become less “front-facing”, as new challengers reshape the industry.
The City has taken the stress test results in its stride. Shares in HSBC and RBS are up a little, while Barclays and Lloyds have dipped.
UK banks fairly muted reaction to stress test results $RBS $BARC $LLOY #banks pic.twitter.com/TZII3vVncX
— Michael Hewson 🇬🇧 (@mhewson_CMC) November 28, 2017
Mary Carney is reiterating that UK banks could handle a hard Brexit -- but there could be trouble if they also faced a wider downturn.
Banks are resilient to a disorderly Brexit, the question is what if something else happens at the same time says BoE's Mark Carney
— Jill Treanor (@jilltreanor) November 28, 2017
*CARNEY: DISORDERLY BREXIT WOULD RESULT IN LOWER STERLING & WEAKER ECONOMY
— nero (@federiconero) November 28, 2017
Q: Are you concerned about the state of the UK mortgage market today?
Mark Carney says the FPC have put several restrictions in place in recent years, to prevent lenders from making unduly risky loans. Those measures seem to be working.
Today’s stress tests also found that buy-to-let mortgages would suffer the bulk of the losses if there was a financial crisis.
Loans to owner-occupiers would be much more modest.
In other words, families would keep paying off their mortgages even if the economy went into recession, but some buy-to-let lenders might struggle to meet their obligations.
Carney - The losses on buy to let mortgages are 4 times the losses on owner occupier mortgages under bank stress tests of rate rise from 0.5% to 4%
— Simon Jack (@BBCSimonJack) November 28, 2017
Updated
Carney: Disorderly Brexit will be painful
Q: Who will bear the biggest burden from a disorderly Brexit, UK households or the banks?
We hope that the banks bear the burden, Carney grins. That’s why they have capital reserves, to cope with tough times.
The governor says:
What we want...is that people who could get mortgages prior to that event can still get mortgages. If you’ve got a good business ides you can still get funding post-Brexit.
But at disorderly Brexit would still have an ‘economic impact’ on households and businesses.
“There will be some pain associated with that”, Carney concludes; the Bank’s job is to dampen that pain.
Carney: a sharp, disorderly Brexit would lead to an "economic impact on households and businesses. There would be some pain associated with that, this is about dampening that" @bankofengland
— Kamal Ahmed (@bbckamal) November 28, 2017
Q: Do regulators on the continent understand the dangers of a disorderly Brexit to the EU?
Carney says there is an “increased appreciation” of these issues on the continent, and the Bank is in regular contact with EU officials about these issues.
He singles out the risks of cross-border insurance and derivatives contracts -- these issues can be fixed, but they take time, he says sternly.
The BBC’s Simon Jack nails it:
Carney - Disorderly Brexit is something we are all working to avoid because there will be significant disruption - but won't be worse than the economic stresses we have put in the tests ie 33% fall in house prices and doubling of unemployment. Not very comforting.
— Simon Jack (@BBCSimonJack) November 28, 2017
Q: Will next year’s stress tests include a specific test for a disorderly Brexit?
No, says Mark Carney. In 12 months time it will be too late.
Mark Carney @bankofengland says disorderly Brexit is "highly unlikely" and all parties are working towards avoiding it
— Kamal Ahmed (@bbckamal) November 28, 2017
Stress tests assumed UK GDP falls 4.7%, unemployment rises to 9.5%, house prices fall 33%. Carney says Hardest Brexit no worse than this.
— Joel Hills (@ITVJoel) November 28, 2017
Updated
Carney: Disorderly Brexit would be costly
Q: What is the impact of a disorderly Brexit on the banking sector, compared to an orderly one?
Mark Carney explains that today’s stress tests modelled a huge recession -- with growth slumping, unemployment tumbling, and the pound shedding a quarter of its value.
Under that scenario, UK banks lose £50bn of capital - but aren’t sunk by those losses.
So... a disorderly Brexit wouldn’t be any worse than that.
Carney says the Bank is putting its money where its mouth is, as it would be called on to support the UK banking scenario if Brexit goes badly.
He warns:
This [a disorderly Brexit] is not a good scenario... it is one we are all working to avoid as it has some quite material economic costs, even if the financial system continues to operate through it.
Updated
Q: Are overseas investors already losing faith in the UK?
The UK has tremendous strengths, Mark Carney replies. But you need a strong “bedrock” to encourage investors to keep putting money into Britain.
Carney: Need legislation to cover derivative contracts after Brexit
Q: Why do you think a disorderly Brexit would be unlikely?
Mark Carney says there were several reasons.
That includes the fact that all parties are working towards an agreement, and have said it would be in the best interests of both sides.
Governor Carney also warns that individual banks can’t resolve the huge number of derivative contracts between the UK and other EU countries (totalling some £20 trillion)
We need secondary legislation to guarantee contract continuity - both in the UK and the EU - he adds.
Onto questions...and straight into Brexit.
Q: How long does a Brexit transition period need to be, and how soon to we need it?
Carney says the minimum transition period is 18 to 24 months (ideally the latter), and it needs to be agreed “the sooner the better”.
Carney: Brexit transitional arrangement of 24 months should be agreed, and "the sooner the better". @bankofengland check list is to "catalyse" action around vast amounts of derivatives and insurance policies.
— caroline binham (@carolinebinham) November 28, 2017
Updated
The Bank of England also tested how UK banks would cope with the disruptive impact of Fintech.
The banks themselves say they are well-positioned to cope.
But the BoE reckons that new technology could have “profound consequences” on incumbent banks.
They include:
- A rise in the cost of recruiting customers, which could hit market share
- A rise in the cost of raising equity - which is bad for profitability.
On Brexit, Mark Carney says the Bank of England focused on the scenarios that would have the biggest impact on UK stability, even if they are unlikely.
And....the Financial Policy Committee judged that UK banks could continue to support the UK economy, even in the event of a disorderly exit from the EU.
But.... Carney adds that banks would struggle to cope with a hard Brexit AND a global recession at the same time.
If a series of “highly unfortunate events happened simultaneously”, capital reserves would be run down and banks would restrict lending to the real economy, the governor adds.
Mark Carney: The £50bn of losses in these stress tests would have wiped out all bank capital 10 years ago
— Jill Treanor (@jilltreanor) November 28, 2017
Carney - for first time all big banks pass stress tests which include 33% fall in house prices and doubling of unemployment.
— Simon Jack (@BBCSimonJack) November 28, 2017
BoE governor Mark Carney says that Britain’s banks are “well-placed to provide credit to households and businesses” even if they suffered recessions in the UK and abroad, large asset price falls, and hefty fines for misconduct.
[reminder: here’s what the tests covered]
Carney confirms that that banks would lose £50bn in the first two years of the scenario - enough to wipe them out 10 years ago. This time round, he says, they are strong enough to cope.
Bank of England press conference begins
Bank of England governor Mark Carney is facing Britain’s (bleary eyed) banking reporters*, to discuss the stress test results.
You can watch it live here:
* - they’ve been locked in the Bank since 5am
Lloyds has issued a statement, confirming that it has passed today’s stress test.
Barclays has also put out a statement, which points out that its results were dragged down by the possibility of fines from banking regulators for misconduct.
An element of the 5.0% drawdown in the BoE’s 2017 stress test reflects litigation and conduct issues which Barclays is aiming to resolve.
Barclays continues to target an end state CET1 ratio of around 13%, although it may temporarily run above that level until these legacy issues are resolved.
Standard Chartered says that it ‘notes’ it has passed today’s stress tests, adding;
The Group has a strong and liquid balance sheet and these results demonstrate the benefits of the actions recently undertaken by the Group to improve its resilience to an extreme stress scenario.
RBS: We're getting there....
Reaction to today’s press conference is flooding in.
Royal Bank of Scotland’s CEO, Ewen Stevenson, says his company is making progress, but admits it has more work to do.
“We continue to make progress towards the stress resilient bank we aspire to be. 2017 represented another year of material improvement with our peak-to-trough stress resilience improving by 300bps from last year’s stress test.
Until we have resolved our remaining major legacy conduct issues and non-core portfolio interests, we will continue to show stress test results weaker than our long term targets.”
This chart shows how Royal Bank of Scotland and Barclays failed to meet the pass mark in today’s stress tests, based on their end‑2016 capital positions.
But... they still passed today’s tests, because they have bolstered their capital positions during 2017.
The 2017 UK bank stress tests are online, here.
Mark Carney: People of the UK should feel confident
The BoE’s Financial Policy Committee, set up to assess risks to the financial system, had judged that:
The UK banking system could continue to support the real economy through a disorderly Brexit.
However the combination of a disorderly Brexit and a severe global recession and stressed misconduct costs could result in more severe conditions than in the stress test,” the Bank said.
Threadneedle Street confirmed that banks would be required to hold an extra £11.4bn in capital by next November, but will now review whether they will need to build an additional cushion in the future in light of the potential risks in the system.
Mark Carney, governor of the Bank of England, said:
The FPC is taking action to ensure the financial system is resilient to a very broad range of risks so that the people of the United Kingdom can move forward with confidence that they can access the financial services they will need to seize the opportunities ahead”.
The seven main lenders lose £50bn during the stress tests which considered fall in GDP, collapse in the pound and record drop in house prices
— Jill Treanor (@jilltreanor) November 28, 2017
Here’s the official confirmation that Britain’s banks have enough capital to withstand a new financial crisis.
We’ve published the results of our 2017 stress test. https://t.co/R5POyRlSCp pic.twitter.com/XwyVKQHzFI
— Bank of England (@bankofengland) November 28, 2017
BoE: Banks could handle a disorderly Brexit
Importantly, the Bank of England has also found that Britain’s banks could cope with a “disorderly” Brexit without having to curb lending or be bailed out by taxpayers.
High street lenders can withstand a disorderly Brexit according to the Bank of England even though RBS and Barclays struggled in latest health check on the banking sector
— Jill Treanor (@jilltreanor) November 28, 2017
@bankofengland says can't say what disorderly Brexit would look like, but banks could withstand it anyway. The assumption is wouldn't be worse than Bank's stress tests: 4.7% fall in unemployment, 9.5% unemployment etc. Cold comfort.
— David Robinson (@DavidRobinson2K) November 28, 2017
UK BANKS PASS THE STRESS TESTS
Here we go!
Britain’s seven largest lenders have passed the tough stress test posed by the Bank of England.
This is the first clean slate since the tests were created in 2014, and suggests the sector is in relatively decent shape to survive the next recession.
BUT! Barclays and Royal Bank of Scotland only passed because they have raised fresh capital during the course of 2017.
More to follow!
BofE Stress Tests “all 7 participating banks have sufficient capital to pass tests”
— Louise Cooper (@Louiseaileen70) November 28, 2017
BoE confirms no #bank needs to raise capital following #stresstest ...clear run now for #dividends ?!
— Karen Tso (@cnbcKaren) November 28, 2017
BoE stress test: the details
Today’s stress tests model the “doomsday” scenario for Britain’s banks, says Business Insider’s Will Martin.
And here it is:
- In the UK economy, the BoE modelled the effects of a sharp recession of more than -4% GDP. This is accompanied by the pound collapsing to just $0.85, a fall of about a third from current values.
- Global growth is also hit, with banks tested on how they would cope with a worldwide contraction of 2.4%. This scenario also includes a collapse in Chinese commercial real estate of more than 40%.
- As a result, unemployment in the UK climbs higher than during the financial crisis.
- Commercial lending collapses, leading to disaster in the property market. House prices fall by 33% and commercial real estate loses 40% of its value.
The Daily Telegraph’s Iain Withers compares today’s stress tests to classic computer game Sim City.....
Fans of the blockbuster Nineties PC title SimCity 2000 will remember it as a fiendishly addictive city management game. Players built roads, homes, offices, shops, factories and utilities in what proved a surprisingly popular simulation of life as a city mayor.
Sometimes the game would suddenly trash your city with an alien invasion, to test your mettle. A massive black metal spider-like creature would pop up on the screen and start razing parts of your lovingly crafted metropolis with laser beams. There was little you could do other than hunker down, wait for the alien to leave, put out the fires and rebuild.
I fear today’s test may not be quite as much fun, though
Updated
The agenda: Bank of England Stress Tests
Good morning. We’re about to discover if Britain’s banking sector is strong enough to survive a new financial crisis.
Bank of England has put the UK’s seven biggest lenders through a series of rigorous tests to see how they’d cope if the economy hit the rocks.
The BoE’s stress tests model a serious financial downturn, at home and abroad.
They examine if banks have enough capital to handle a sharp fall in UK and global growth, a surge in consumer bad debts, a plunge in the pound, and a jump in unemployment caused by higher interest rates. It will also test their long-term financial resilience.
The seven lenders are Barclays, Royal Bank of Scotland, Lloyds, HSBC, Standard Chartered, Santander’s UK operations, and the Nationwide building society.
The results are released at 7am GMT, and will show which banks are best, and least, prepared for the next recession.
Banks whose exam paper comes back covered in red ink will face tough questions about their resilience. Any lender who actually fails the test forced to sell off assets or ask existing shareholders and bondholders for more cash.
Last year Royal Bank of Scotland fell short, so it’ll be under particular scrutiny this year. A poor performance could undermine the UK government’s attempt to sell its majority stake in RBS.
We already know that the lenders will suffer £30bn of losses on consumer loans under the tests. Today’s results will show where those losses are concentrated.
Adding to the fun, the Bank of England is also releasing its latest Financial Stability Report this morning. That will show the BoE’s view of the UK financial system, and the key threats to financial stability.
Our City editor Jill Treanor is locked in the Bank of England, reading the stress test now ahead of 7am. Here’s her preview:
Here’s the agenda
- 7am GMT: UK bank stress tests released
- 7.30am GMT: Bank of England governor Mark Carney holds a press conference. He’ll discuss the stress test results and the BoE’s financial stability report
- 10am GMT: OECD releases its latest economic outlook
- 1.30pm GMT: US trade balance for October
- 2.45pm GMT: Federal Reserve chair nominee Jay Powell’s confirmation hearing at the US Senate
Updated
