Lloyds and RBS pass BoE stress test as Co-op fails

Bank of England governor Mark Carney described financial stress test as 'demanding'. Picture: Getty
Bank of England governor Mark Carney described financial stress test as 'demanding'. Picture: Getty
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THE Co-operative Bank was today ordered to cut the size of its loan book by £5.5 billion after failing the Bank of England balance sheet “stress tests”, with taxpayer-backed Lloyds and Royal Bank of Scotland narrowly passing.

The Co-op’s financial arm had flagged it was likely to fail the tests after its near-collapse last year, and was the only one of eight lenders to come up short as the Bank of England assessed their ability to cope with a severe hypothetical economic downturn.

However, City banking analysts said the narrowness of the margin by which Lloyds squeaked through the examination left in the balance its ability to resume paying dividends to shareholders early next year following its £20bn state bailout in 2008.

The test required banks to have a core capital ratio to their loan books of 4.5 per cent in a scenario of house prices slumping 35 per cent, commercial property falling 30 per cent and interest rates rising from the current 0.5 per cent to 4 per cent.

In addition, it postulated the unemployment rate almost doubling to 12 per cent, sterling weakening, economic output falling 3.5 per cent and a major slide in the stock market.

The stress test showed Co-op Bank’s core capital ratio would sink to minus 2.6 per cent in this doomsday scenario, and RBS and Lloyds’s ratios would drop to 5.2 and 5.3 per cent respectively allowing for emergency “management actions” at the time such as cost cutting to conserve capital.

The Bank’s assessment means the Co-op’s financial arm, now majority controlled by bondholders, hedge funds and other outside investors, has to reduce its loan book by £5.5bn by the end of 2018.

Lloyds, owner of Bank of Scotland and Scottish Widows, was seen as especially vulnerable to the stress tests because it is the most dependent on the UK economy, with a leading, 30 per cent share of the mortgage market and one in three of UK current accounts.

On the same basis, HSBC’s core capital would be 8.7 per cent, Asia-centric Standard Chartered 8.1 per cent, Santander UK 7.9 per cent, Barclays 7.5 per cent and building society Nationwide 6.7 per cent.

David Moss, head of European equities at F&C Investments, said: “While the passes weren’t great, they were passes.”

The Bank”s Financial Policy Committee, whose remit is to monitor systemic banking risk and promote growth, said it showed Britain’s banking system was much safer than just a few years ago. Governor Mark Carney said: “This was a demanding test. 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.”

Andrew Tyrie, chairman of the Commons Treasury committee, added: “The extreme scenario used by the Bank might seem unlikely but they are right to use it. It is crucial that the banks have capital buffers in place to meet such shocks.”

• Private equity firm Cerberus today agreed to buy a package of loss-making Irish property loans from RBS for £1.1bn, and will acquire £1.2bn of higher-risk UK commercial real estate loans from Clydesdale-owner National Australia Bank.

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