Co-operative Bank has failed a key test of how it would perform in a financial crisis by the Bank of England, and Royal Bank of Scotland (RBS) and Lloyds Banking Group were warned that their capital position at the end of 2013 was inadequate.
U.K. banks' over-reliance on the housing market was also highlighted, just as house price growth in the country appears to have peaked. The Bank of England also warned about the danger of falling oil prices reinforcing "certain geopolitical risks."
The Co-op Bank did not pass the "stress test" scenarios by the
Bank of England, which aimed to work out whether banks had enough capital to survive, for example, a 35 percent plunge in house prices.
U.K. banks' over-reliance on the housing market was also highlighted, just as house price growth in the country appears to have peaked. The Bank of England also warned about the danger of falling oil prices reinforcing "certain geopolitical risks."
The Co-op Bank did not pass the "stress test" scenarios by the
Bank of England, which aimed to work out whether banks had enough capital to survive, for example, a 35 percent plunge in house prices.
The worst-case scenarios also included: interest rates
rising from 0.5 percent to above 4 percent, unemployment nearly doubling
to 12 percent, and a 30 percent drop in the value of sterling against a
basket of other currencies.
RBS and Lloyds were told that they needed to strengthen their capital position as of the end of 2013 further, but the Bank of England added that their situation since then has improved. As such, only Co-op has to submit a revised capital plan.
Barclays, HSBC, Nationwide, Santander UK and Standard Chartered all passed the stress tests comfortably.
Mark Carney, governor of the Bank of England, said: "This was a demanding test. The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited."
John McFall, former chairman of the House of Commons Treasury Select Committee, told CNBC that, for the banks to restore trust among the broader population, they needed to reconnect with the community.
"A generation ago banks were embedded within our communities. Now there is just a call center mentality with their customers," he told CNBC.
"Banks have to decide whether they should serve the wider community and have a social obligation. At the moment, that is a pipe dream."
RBS and Lloyds were told that they needed to strengthen their capital position as of the end of 2013 further, but the Bank of England added that their situation since then has improved. As such, only Co-op has to submit a revised capital plan.
Barclays, HSBC, Nationwide, Santander UK and Standard Chartered all passed the stress tests comfortably.
Mark Carney, governor of the Bank of England, said: "This was a demanding test. The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited."
John McFall, former chairman of the House of Commons Treasury Select Committee, told CNBC that, for the banks to restore trust among the broader population, they needed to reconnect with the community.
"A generation ago banks were embedded within our communities. Now there is just a call center mentality with their customers," he told CNBC.
"Banks have to decide whether they should serve the wider community and have a social obligation. At the moment, that is a pipe dream."
Co-op Bank had been expected to fail the tests. The bank,
once part of the Co-Operative movement, was taken over by private equity
companies last year after a series of embarrassing headlines about the
state of its finances – and revelations about the drug habits of its
former chairman Paul Flowers. It will now speed up its plans to sell off
assets and strengthen its capital position.
Niall Booker, chief executive of the Co-op Bank, said: "Given we are in the early stage of our plan, the original capital deficit and the nature of our assets, it is no surprise that we have not met the severe stress test hurdle today.
"Our revised plan, accepted by the regulator, will see us accelerate our strategy to significantly reduce risk weighted assets."
Niall Booker, chief executive of the Co-op Bank, said: "Given we are in the early stage of our plan, the original capital deficit and the nature of our assets, it is no surprise that we have not met the severe stress test hurdle today.
"Our revised plan, accepted by the regulator, will see us accelerate our strategy to significantly reduce risk weighted assets."
Dividend under threat
Taxpayer-backed Lloyds' plans to pay a dividend next year
now also look under threat. Together with RBS, it will have to get
permission from the Bank of England to resume payouts to shareholders.
RBS's "minimum stressed ratio" - the key threshold of whether it has enough capital to survive the theoretical stresses - before planned management actions was 4.6 percent, just above the 4.5 percent the Bank of England was looking for. Lloyds came in at 5 percent, while Co-op fell far below the threshold at -2.6 percent.
António Horta-Osório, chief executive of Lloyds, said: "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."
RBS announced the £1.1 billion ($1.72 billion) sale of a portfolio of Irish real estate loans to U.S. private equity group Cerberus, as reported by CNBC in September.
McFall added that the government and politicians should "take note of the results and be very relaxed when it comes to deposing of it ownership."
In October, 24 European banks, none from the U.K., failed European Banking Authority "stress tests" of their finances.
The U.K. held separate, more stringent tests, to look at the particular risks associated with the U.K. The European tests only looked at systematically important banks, which in the U.K. meant its four biggest banks. However, RBS only narrowly scraped through, and admitted in November it had overstated how much it had passed the tests by.
- By CNBC's Catherine Boyle
RBS's "minimum stressed ratio" - the key threshold of whether it has enough capital to survive the theoretical stresses - before planned management actions was 4.6 percent, just above the 4.5 percent the Bank of England was looking for. Lloyds came in at 5 percent, while Co-op fell far below the threshold at -2.6 percent.
António Horta-Osório, chief executive of Lloyds, said: "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."
RBS announced the £1.1 billion ($1.72 billion) sale of a portfolio of Irish real estate loans to U.S. private equity group Cerberus, as reported by CNBC in September.
McFall added that the government and politicians should "take note of the results and be very relaxed when it comes to deposing of it ownership."
In October, 24 European banks, none from the U.K., failed European Banking Authority "stress tests" of their finances.
The U.K. held separate, more stringent tests, to look at the particular risks associated with the U.K. The European tests only looked at systematically important banks, which in the U.K. meant its four biggest banks. However, RBS only narrowly scraped through, and admitted in November it had overstated how much it had passed the tests by.
- By CNBC's Catherine Boyle
No comments:
Post a Comment