Bank stress tests revealed

The Bank of England’s latest stress test results have shown three out of eight high street banks do not have adequate financial strength.

It was discovered a severe economic shock would cause the Co-operative Bank to collapse and Lloyds Banking Group and the Royal Bank of Scotland (RBS) would only barely pass.

The stress test involves the central bank creating a hypothetical scenario where there is a sharp rise in interest rates, unemployment increases, house prices collapse and the economy enters a deep recession.

Following the test, the Co-op bank has been ordered to submit a new plan after it was discovered the scenario would leave the bank’s capital ‘exhausted’.

Niall Booker, head of the Co-op bank, confirmed the company will now speed up its current plans to shed assets, especially its Optimum portfolio of higher risk mortgages.

Both RBS and Lloyds were close to failing the stress test, but the Bank of England has not requested them to submit new plans because they have both started to increase capital holdings.

“We recognise that there is still much work to be done to improve the resilience of our balance sheet,” said RBS finance director Ewen Stevenson.

António Horta-Osório, the current head of Lloyds, said the bank had been increasing its capital since the end of 2013.

The Bank of England governor, Mark Carney, said the stress test findings had helped to reassure the government and the public.

“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,” he said.

However, there remains other concerns despite the relatively positive results, that will need to be addressed.

“Recent misconduct and other operational failings have highlighted that rebuilding confidence in the banking system requires more than financial resilience,” the Bank said.

“That, and changes to banks’ business models in response to commercial and regulatory developments, make it important for banks to continue to enhance the effectiveness of their governance arrangements.”

The other five banks involved in the tests were HSBC, Barclays, Santander UK, Standard Chartered and the Nationwide building society.

Next year the Bank of England is likely to focus on more global risks and therefore the emphasis could be place on HSBC and Standard Chartered.

They were not required to submit new plans. HSBC and Standard Chartered may be the focus next year when the Bank of England puts more emphasis on global risks.

The central bank has confirmed it will not include more lenders in the next round of stress tests, but has warned the leverage ratio will become part of the test at some point.