BOE Says Stress Test Shows Banks Can Withstand Disorderly Brexit

  • Barclays and RBS fall short, but don’t have to raise capital
  • BOE raises countercyclical capital buffer rate to 1%

The City of London.

Photographer: Jason Alden/Bloomberg

The Bank of England said the U.K.’s biggest lenders emerged from its latest stress test with the strength to keep lending even during a “disorderly” Brexit.

Five of the seven banks passed the health check, while two -- Barclays Plc and Royal Bank of Scotland Group Plc -- fell below their systemic reference point, a higher threshold that reflects their global significance. Yet actions taken by the banks since end-2016 mean neither needs to bolster their capital, the BOE said on Tuesday.

While the test didn’t factor in economic shocks specifically related to the withdrawal from the European Union, it pitted banks against a 4.7 percent plunge in U.K. output, the pound crashing 27 percent versus the dollar, house prices devaluing by a third and 40 billion pounds of misconduct charges.

“The stress-test scenario therefore encompasses a wide range of U.K. macroeconomic risks that could be associated with Brexit,” the BOE said. As a result, it “judges the U.K. banking system could continue to support the real economy through a disorderly Brexit.”

Misconduct Costs

A messy divorce -- with no trade deal or transition agreement -- coupled with a “severe global recession and stressed misconduct costs” could push banks beyond the limits of the stress test, forcing them to draw down capital buffers substantially more. In this case, firms would be more likely to reduce lending, the BOE said.

The BOE also followed through on its plan to increase the countercyclical capital buffer to 1 percent. In June, the regulator said this buffer level would increase required system- wide capital by 11.4 billion pounds “given current risk- weighted assets.”

The increase becomes binding in a year. It won’t force banks to strengthen capital, but it will require them “to incorporate some of the capital they currently have in excess of their regulatory requirements into their regulatory capital buffers.”

The central bank’s Financial Policy Committee will consider the adequacy of the buffer rate during the first half of 2018 and could raise the level again.

Dividend Payments

HSBC Holdings Plc, Lloyds Banking Group Plc, Nationwide Building Society, Santander U.K. Plc and Standard Chartered Plc all passed the health check, which was based on end-2016 data.
The seven lenders incur losses of about 50 billion pounds in the stress scenario, a level that “would have wiped out” their common equity capital a decade ago. All banks stop paying dividends, bonuses and additional Tier 1 debt coupons under the scenario.

Barclays fell below its systemic reference points for common equity Tier 1 capital and Tier 1 leverage ratio, the BOE said. It wasn’t required to submit a new capital plan thanks to steps taken since December, including issuing 2.5 billion pounds of AT1 debt and selling down its majority shareholding in Barclays Africa Group Ltd.

RBS missed its CET1 ratio systemic reference point, but like Barclays wasn’t required to submit a new capital plan.

Before the test results were announced, Goldman Sachs Group Inc. analysts led by Martin Leitgeb said the focus would be on Barclays, Lloyds and Standard Chartered because they are all trying to increase or restart dividend payments.

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