Eight of Britain’s biggest lenders will discover today if they have passed key balance sheet tests showing how they would cope with a draconian and prolonged economic downturn.
The so-called “stress tests” by the Bank of England – released at 7am before the stock market opens – have scrutinised how the lenders’ capital cushions would handle a 35 per cent nosedive in house prices and 30 per cent plunge in the stock market.
It comes after similar tests by the European Union banking authorities in October were passed by Barclays, HSBC, Lloyds and Royal Bank of Scotland – Britain’s big four banks.
However, RBS was left red-faced after it admitted later that it got its sums wrong, meaning it only scraped through, rather than passing easily as first suggested.
The Bank of England tests, which the banking industry sees as more rigorous, cover Co-operative Bank, Nationwide, Santander UK and Standard Chartered, as well as those tested by regulators across the Channel.
They suggest a hypothetical UK economic backdrop of interest rates jumping to 4.2 per cent from current record lows of 0.5 per cent, squeezing indebted households and businesses alike.
The Bank’s tests simulate a situation between the beginning of 2014 and the end of 2016 whereby economic growth falls as much as 3.5 per cent.
It also envisages a 30 per cent fall in sterling, inflation of more than 6.5 per cent, and unemployment soaring to 12 per cent.
The scenario pictures a “cumulative contraction” that has only been seen once in 150 years, after the First World War. The Bank of England stressed earlier this year that the doomsday scenario was well outside its own projections for the UK economy.
Co-op Bank boss Niall Booker, pictured below, has admitted it will be “no surprise” if it fails the latest tests, with the self-styled ethical bank still rebuilding its balance sheet after its near-collapse last year.
The Co-op’s financial arm, now majority controlled by bondholders and hedge funds after an ill-starred takeover of Britannia building society and abortive attempt to buy 600 Lloyds bank branches, has already had to raise £1.9 billion in capital.
The City is particularly interested in how Lloyds, still 25 per cent owned by the taxpayer after its £20bn bailout, fares in the stress tests because of its leading 30 per cent share of the UK’s mortgage market.
It also has one in three of the country’s current accounts, making it the most UK-centric of the big four banks. One analyst said: “It might be problematic for Lloyds to resume dividend payments early next year if it fails the examination.”
HSBC and Standard Chartered are regarded as less exposed to the UK stress test scenario, with HSBC’s sprawling international business presence from the US to Hong Kong, and Standard heavily Asia-centric.
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