Stress Test for UK Banks

“The UK banking system has weathered the pandemic well,” said Andrew Bailey, BoE governor, adding that the test included a “much more severe evolution of the pandemic and consequent economic shock” such as £70bn of loan losses, far higher than the £20bn of charges the banks took last year.

The BoE said it would reintroduce a requirement for banks to keep a special rainy day fund, known as the “countercyclical buffer”. This condition was suspended in 2020 to give banks room to keep lending even if the pandemic triggered significant losses.

The top eight banks could withstand a near tripling of unemployment, a sharp fall in property prices, and a significant economic contraction. So the Bank of England said yesterday that it gave lenders a clean bill of health almost two years into the coronavirus pandemic.

“Now is the right time to start rebuilding resilience,” Bailey said, as he announced the reintroduction of the countercyclical buffer: each bank will have to bring it back up to half its pre-Covid levels by December 2022.

The tests were created after the financial crisis as an early warning system so regulators could force banks to cut shareholder payouts, raise money or take other action if an imagined situation would leave them in need of a bailout. All eight were tested against a doomsday scenario, including an £800bn hit to GDP between 2020 and 2022, unemployment peaking at 12 per cent and a 33 per cent fall in residential and commercial property prices.

The pandemic has led to a hit to GDP of less than £300bn, while the latest unemployment rate was 4.3 per cent.

The findings resulted from the first stress test of the biggest lenders two years after the 2020 assessment was cancelled due to the pandemic.

The BoE found the banks had improved their capital positions over 2020, even as billions were set aside to deal with potential Covid-related losses.

The BoE’s financial policy committee said it would not loosen standards for mortgage lending but would consult next year on whether existing affordability limits were appropriate.

Banks are holding far more capital than they are required to, so they will not have to raise cash or cut dividends for the buffer. As a result, house prices have recorded their fastest quarterly rise in 15 years, though commercial property values have fallen as the pandemic pushed people out of offices and cities.

Summarised www.sba.tax

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