This week the Bank of England announced the results of its annual stress tests, which it carried out on the seven largest lending banks in the UK. The stress tests are designed to check that the banks have enough capital to withstand a crisis scenario put together by central bank officials. This time the scenario involved slowing growth in China, a further slump on commodity prices, further regulatory penalties and a deflationary recession in the UK and Eurozone.
The purpose of these tests is to provide reassurance to both consumers and investors that the banking sector, which makes up a significant proportion of the FTSE 100, is resilient enough to cope with adverse economic conditions. One of the main parameters by which this is measured is by calculating the amount of primary reserves a bank has compared to the risks it has undertaken, for instance through loans; this is often referred to as the Core Equity Tier 1 ratio.
All seven banks passed this year’s test, which was based on accounts at the end of 2014. Having said this, both Standard Chartered and RBS were highlighted as falling below the minimum capital requirements. However, neither is required to submit a revised capital plan because the Bank of England took into account actions taken by the two in 2015 to address their capital shortfalls. Standard Chartered has announced a radical restructuring plan and a rights issue while RBS has sold its US subsidiary business and taken further precautionary measures.
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