All seven of the biggest lenders in the UK passed the Bank of England's most recent stress test, which assessed their ability to withstand an economic shock more severe than the global financial crisis.
According to the data released on Tuesday, the businesses will have sufficient capital to continue lending despite economic pressures.
It was anticipated that every lender would pass the exams. The central bank also decreased its estimate of how much capital the UK’s banking sector needs for the first time in a decade, and suggested a review that may free up greater lending and higher rewards to shareholders.
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.
In order to determine whether the industry had sufficient capital to weather economic challenges, the UK's monetary authorities instituted such routine testing in 2014 following the global financial crisis. The study is undertaken every other year. All lenders passed the BOE’s prior stress test in July 2023 as well.
This year, tests were conducted on Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc, Nationwide Building Society, NatWest Group Plc, the British division of Banco Santander SA, and Standard Chartered Plc. Approximately 75% of lending to the UK economy comes from them together.
According to the BOE, the scenarios evaluated include a major global aggregate supply shock that causes a profound recession in all countries and an increase in inflation in advanced economies. Central banks would then raise interest rates to bring inflation back to target. The exam took into account:
1. The GDP of the UK decreased by 5%, while the unemployment rate increased to 8.5%.
2. The global economy shrinking by 2%.
3. UK and global property prices collapse in the scenario and commercial real estate values decline.
4. Elevated risk aversion leads to substantial losses in asset prices; rising 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 indicator 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. The test did not force any particular bank to improve its capital position.
Additionally, the BOE calculated that UK banks banking book exposures to corporates and private market funds backed by financial sponsors, including private equity funds, were £173 billion ($229 billion).
While resilient to date, private markets have risen fast since the global financial crisis and have not been tested via a broad-based macroeconomic stress at its current magnitude, the central bank said.
The structure of these markets has altered, with a wider group of asset managers and private credit funds making more use of funding from banks, in addition to providing more direct lending to the business sector.
According to the BOE, this has made it challenging to evaluate the effects of a stress on the larger financial system, and regulators are still keeping an eye on the risks associated with the exposures.
“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.”
