UK’s Biggest Banks Show Resilience in Latest BOE Stress Test

(Bloomberg) — The Bank of England said all of the UK’s seven largest lenders passed its latest stress test, which examined their resilience to an economic shock worse than the global financial crisis.

The firms would have enough capital to continue lending through strains to the economy, according to the results published on Tuesday. All the lenders were expected to pass the tests. The central bank also cut its estimate of how much capital the UK’s banking sector needs for the first time in a decade, and signaled a consultation that could free up extra lending and higher payouts to shareholders.

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The results indicate that “the UK banking system would be able to continue to support the economy even if economic conditions turn out materially worse than expected, enabling it to contribute to long-term sustainable economic growth,” the BOE said in its report.

The UK’s monetary authority introduced such regular testing in 2014 in the aftermath of the global financial crisis to check if the sector had enough capital to withstand economic difficulties. The study is conducted every other year. All lenders passed the BOE’s previous stress test in July 2023 as well.

Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc, Nationwide Building Society, NatWest Group Plc, Banco Santander SA’s British arm and Standard Chartered Plc were tested this year. Together they account for around 75% of lending to the UK economy.

The scenarios tested include a severe global aggregate supply shock, leading to a deep recession across countries and a rise in inflation across advanced economies, with central banks raising interest rates to bring inflation back to target, the BOE said. The test took into account:

• The UK’s GDP falling by 5% and unemployment rising to 8.5%

• The global economy declining by 2%

• UK and global house prices plunge in the scenario and commercial real estate prices drop

• Elevated risk aversion leads to large falls in asset prices; higher sovereign debt levels in advanced economies put further upward pressure on government bond yields

In the stress test, the aggregate CET1 capital ratio — a key measure of capital strength — starts at 14.5% for the British lenders and falls to a low point of 11% in the first year, the BOE said. No individual bank was required to strengthen its capital position as a result of the test.

Private Markets

The BOE also estimated that UK banks have £173 billion ($229 billion) of banking book exposures to private market funds and corporates backed by financial sponsors, including private equity funds. While resilient to date, private markets have grown rapidly since the global financial crisis and have not been tested through a broad-based macroeconomic stress at its current size, the central bank said.

The structure of these markets has evolved, with a wider set of asset managers and private credit funds making greater use of financing from banks, in addition to providing more direct lending to the corporate sector. That’s made it difficult to assess the impacts of a stress on the wider financial system and authorities continue to monitor risks arising from the exposures, the BOE added.

“The data provided by banks this year has improved the level of insight into the interconnections between banks and private finance,” the BOE said in its report. “However, this remains a challenging area, where data remains limited on the underlying investors and assets on which bank lending to private market funds is secured.”

(Updates with details of scenarios and private markets exposures.)

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