Summary: Stress tests, and the end of the ‘post-crisis period’
OK, time to wrap up.
HSBC, Barclays, Lloyds, Santander and Nationwide all breezed through – but Royal Bank of Scotland and Standard Chartered only got a tick due to action already taken to boost their capital reserves. RBS admitted that it must to more to become a ‘strong and resilient’ bank.
The Bank of England has declared that the “post-crisis period is over”. It also promised that it is not planning a further wave of capital requirements on the banks.
Buy-to-let landlords may be concerned to hear that the BoE is monitoring the sector closely. The central bank is concerned that BTL borrowers could be in the firing line when interest rates rise, or house prices fall.
The BoE is also considering imposing a higher counter-cyclical buffer on banks. That would make them hold onto more capital, reining in risky lending and giving them more protection for a downturn. Governor Mark Carney has hinted that this would allow the Bank to leave interest rates at record lows for longer.
Bank shares have rallied, as traders showed relief that no-one actually failed the test.
And that’s all for today. Cheers. GW
Our financial editor Nils Pratley is concerned that the BoE may letting the banks off too easily:
In the aftermath of the 2007-09 crisis, regulators seemed determined to set banks’ capital thresholds far higher than is now deemed acceptable. The UK’s Vickers commission and the international Basel committee spoke of core equity ratios of 18%. In the event, the Bank has settled on 11%.
Mark Carney, to be fair, gave a full explanation. First, capital is better designed these days – bondholders in the biggest banks can be forced to take pain in a crisis, for example. Second, “forward-looking” regulators are making better judgments on risks. Third, countercyclical buffers can be flexed up and down as conditions require.
The arguments all sound plausible, but 18% to 11% is a mighty leap downwards. Perhaps it was necessary to avoid “the stability of the graveyard”, meaning banks so over-capitalised that they take too few risks. But perhaps more alarmingly, today’s central bankers just have complete faith in their ability to spot dangers.
These two charts explain why the Bank of England is fixing its eye firmly on the buy-to-let market, but isn’t actually trying to puncture the credit market yet:
Updated at 1.47pm GMT
The rallying bank shares mean London’s stock market is beginning December on the front foot.
With Barclays jumping 4%, RBS gaining 3% and Lloyds up 2.5%, the wider FTSE 100 has risen by 37 points to 6394. That would be a three week high (if the market closed now).
It could be the start of the traditional ‘Santa rally’, as my colleague Sean Farrell explains:
Investors could bag themselves a better Christmas present than socks or an Adele CD by putting money into the stock market at the start of December, if history is a guide.
The so-called Santa rally, in which shares do well at the end of the year, is backed up by a surprising amount of evidence but there is less agreement on the cause of the trend.
Research by the stockbroker Hargreaves Lansdown shows that December has been the best month for the stock market in the last 30 years. British shares have risen in December almost nine times in 10 in that time and the average December return was almost three times that for all months of the year…
Updated at 1.10pm GMT
Get your diaries out… the 2016 Budget will take place on Wednesday March 16:
Mark Carney’s broad message today is that Britain’s financial sector is finally leaving its ‘post crisis period’.
That’s the long era of reconstruction which began once the dust settled after the failure of Lehman Brothers. It has seen new rules to regulate the City, new bosses at our major banks, and billions of pounds of fines and compensation.
The Financial Times has a good take:
The Bank of England has declared that the UK’s financial system has moved out of the “post-crisis period” but was not showing enough signs of overheating to require action to rein in credit.
Officials at the Bank clarified that in future they would seek to use regulation to strengthen lenders in good times rather than tame the credit cycle.
The BoE’s Financial Policy Committee said on Tuesday it “intends to make active use of the time-varying countercyclical capital buffer” — the capital banks must build up in good times to ensure they can operate their core banking functions in the event of a shock. But it declined to raise that buffer immediately from 0 per cent and said any increase, expected in March, would not raise overall capital requirements for the UK banking system.
“There is no Basel IV,” said Mark Carney, BoE governor, referring to concerns over a new and tighter round of global banking regulations. “Our objective has never been to raise capital without limit or raise it by stealth.”
A quick peek at the commodities market shows why the Bank of England is cautious about the global economy – the iron ore price has hit a record low today:
Steven Hall, banking partner at KPMG, has ploughed through today’s stress test results (which are online here) and found a problem.
Although the banks had enough decent-quality capital to handle the 2014 test (based on a UK downturn) and also to pass this year’s exam (which included more international risks), they would struggle to pass a combination of both scenarios.
And that’s what the 2016 test will do.
“Another stress test and another festive celebration as all the banks pass. However the overall severity of the stress impact on CET1 capital levels is higher this year compared with last year.
The good news for UK banks is that by combining today’s stress impacts with the additional capital accretion and asset reductions they have completed in 2015 would mean all 7 banks would pass the tougher stress test hurdle that the PRA will apply from next year. We calculate that in aggregate the sector has a buffer of £115bn of capital as of Q3 2015.
The bad news is that if one combined this year’s scenario (trading and conduct related) with last year’s UK domestic property-related shock, we estimate that the aggregate CET1 capital ratio would not meet the proposed 2016’s combined hurdle with an estimated £23 billion shortfall in CET1 capital.
Barclays has now climbed to the top of the FTSE 100 leader board, up over 4% today.
The City is welcoming today’s stress test results, and Mark Carney’s insistence that regulators won’t impose much tougher capital requirements.
Mike Van Dulkan of Accendo Markets says Barclays has done better this year than in the 2014 tests:
UK banks shares are in celebratory mood this morning in the wake of the latest round of BoE stress tests. This comes from suggestions that the central bank is set to ease capital pressures on the sector after years of post-crisis reform in contrast to expectations of stiffer hurdles next year.
Barclays (BARC), however, is outperforming on account of its bigger exposure to riskier investment banking activities, an area it had been scaling back due to excessive pre-crisis risk-taking that led it into trouble, as well it last year having the lowest levels of capital for this year’s new leverage ratio test.
While all passed, peers RBS and Standard Chartered only did so thanks to bolster buffers and ensure targets are hit.
Both RBS and Lloyds were close to the mark last year, but Lloyds turnaround efforts have served it while RBS still clearly has much work to do. <end>
It’s good news for new CEO Jes Staley on his first day at Barclays. He had lost 300 grand on shares purchased since his appointment….
A couple of photos from today’s press conference:
Updated at 10.47am GMT
David Parker, Head of UK & Ireland Banking at Accenture, says the Bank of England is right to be concerned about cybercrime risks (as Jon Cunliffe hinted earlier).
Interestingly, the Systemic Risk Survey [online here] published today sees a significant increase in those who now believe a cyber-attack poses a risk to the UK financial system. As banks look to offer new services to their customers in an increasingly competitive field, they create the potential for new vulnerabilities in their systems.
Financial institutions need to focus on both operational and technical ways to counter this threat. These range from changing the way they think about risk to investing in cutting edge cyber security systems.
Every silver lining has a cloud, though:
Some unexpected good news from the eurozone just landed.
The eurozone unemployment rate has dropped to 10.7%, lower than expected, and the best reading since December 2011:
That’s still double the rates in the UK and America, though.
Today’s stress test results should give Britain’s banks more confidence to boost their lending.
So argues James Belmont, director of risk and compliance at management consultants Baringa Partners:
The news that five of the seven banks passed the 2015 stress test, and the remaining two, RBS and StandardChartered, have taken appropriate steps to strengthen their balance sheets and will not be required to raise additional capital, will be given a guarded welcomed across financial markets.
It should give banks greater confidence to expand their credit to the real economy, helping fuel job creation and long-term investment.
Belmont also reminds us why some banks did worse than others:
The extended stress scenario, which included Chinese growth slowing “materially” and lower oil prices, had a greater impact on banks with significant retail and corporate presence in Asia and emerging markets, such as HSBC and Standard Chartered, and universal banks with material trade risk exposures to these markets, such as HSBC, Barclays, Standard Chartered and RBS.
Samuel Tombs, chief UK economist at Pantheon Macroeconomic, says the Bank of England seems relatively relaxed about the banking sector.
It judged the appropriate Tier 1 equity requirement for the banking system to be 11% of risk-weighted assets, less than the 13% held in aggregate by the major banks in September 2015.
And it judged that banks do not need to raise more capital in response to this year’s stress tests, which they all passed by a healthy margin, even though the test’s economic scenario was severe.
UK factory growth slows
Breaking away from the Bank of England briefly…. a closely watched survey of British factories has shown that growth slowed last month, but remains fairly solid.
The UK manufacturing PMI, which measures activity across the sector, fell to 52.7 in November, down from October’s 16-month high of 55.2.
Any reading over 50 indicates that activity and output rose.
Markit, which compiled the report, says it shows that manufacturing is less of a drag than during the summer (when it shrank by 0.4%).
Markit’s Rob Dobson adds:
“While the improvement in recent months is a welcome trend, scratching beneath the surface of the manufacturing numbers stills exposes a number of weaknesses.
Growth remains heavily focussed on the domestic consumer, while the strong gains at large-scale producers have yet to filter through to SMEs. A broadening of the expansion is necessary if the nascent recovery is to be sustained.
Mark Carney ends the press conference by repeating that he’s not planning to slap the sector with tougher capital requirements:
That may be a not-too-subtle hint at those bankers who have complained that they might move their headquarters out of Britain to avoid its regulatory regime.
BoE may test for cyber-crime risks
Q: Could the Bank include a cyber attack in future stress tests?
Deputy governor Jon Cunliffe reminds us that the first stress test (in 2014) focused on the UK economy. Today’s test has an international flavour – modelling an emerging market crash that sends a wave of deflation across the globe.
So in the future, the annual stress test won’t change too much – it will model changes in housing, unemployment, some overseas impact.
But every other year, the Bank will also launch an ‘exploratory scenario’, which will allow it to examine a broader range of risks.
And a cybercrime attack is “a possibility”, Cunliffe concludes.
Updated at 10.11am GMT
Any time you increase the capital, there is a flow through to the cost of borrowing, Mark Carney says.
Q: What might future stress tests look like?
Carney reiterates that the regulators are not planning a new ’big wave’ of capital requirements. Instead, they want to strengthen and clean up remaining problems in the system.
As Carney puts it:
There will be changes that merit the ‘back page’* of the paper, but not the front page.
(* I don’t think he means the sport section!).
Reminder: The Bank hasn’t adjusted the counter-cyclical buffer today, but it has signalled that it might do so in March 2016.
Q: Would raising the counter-cyclical buffer in March 2016, to force banks to hold more capital, allow the Bank to leave interest rates unchanged for longer?
Carney explains that the buffer is a better way of handling risks than raising interest rates (which is a blunter tool).
So if you can increase resilience in the system by using this kind of macro-prudential tools, you don’t need to raise interest rates to address financial stability risks.
Interest rate rises, when they come, will be limited and gradual, Carney insists (not for the first or last time).
So if the Bank’s Financial Stability Committee is vigilant to financial risks, it gives the Bank’s Monetary Policy Committee more confidence that it can just use interest rates to handle inflation, not financial stability risks.
(I think that’s a ‘yes’)
Updated at 8.51am GMT
Q: Why does the Bank of England have a counter-cyclical buffer, and under what conditions might it lower the buffer to encourage risk?
This is a complicated issue, Carney says, but worth understanding.
The top-line is that there is basically enough capital in the UK banking system to cover future losses.
The counter-cyclical buffer is needed because there are deficiencies in how risk is measured globally. (if there weren’t, we wouldn’t need the buffer at all).
So the buffer goes up when times are good, and down when banks are risk-averse (to encourage lending).
Updated at 11.39am GMT
Q: Are you under any political pressure to water down your regulatory changes because of complaints from the banks?
No, absolutely not, Carney replies.
The responsibility for financial stability rests with the Financial Policy Committee, and we will do everything within our power to enforce it and create conditions for balanced, sustained growth.[this relates to the global review of bank’s trading books]
And Carney adds that global regulators are absolutely not preparing to force the overall banking sector to hold more capital (although obviously some banks will need to).
“I will say it again and I would like you to print it…there is no Basel 4. there is no big wave of capital to come.”
(The Basel committee draw up these global rules for banks)
Updated at 8.57am GMT
Some banks will always need to take actions [to strengthen their capital base], but this is a well-capitalised system, says Mark Carney.
Deputy governor Jon Cunliffe also weight in on the buy-to-let market.
A survey found that 15% of buy-to-let landlords said they would consider selling if they couldn’t meet their mortgage payments from rental income, he says.
And 45% said they would consider selling if house prices fell.
And a property downturn can have a serious impact on the banking sector, Cunliffe continues, as commercial real estate is used to secure lending a large percentage of UK borrowing.
Carney says there is no question that the Bank has built resilience into the core of the banking system, to protect the UK from global turmoil.
Q: How concerned is the Bank of England about the buy-to-let market?
Carney says the BoE isn’t taking any action now.
He says the new stamp duty levy announced by George Osborne in last week’s autumn statement will affect the market.
Deputy governor Andrew Bailey adds that that the Buy-to-Let market isn’t regulated separately. But there is evidence that the sector is more sensitive to interest rate rises than the wider market, so the Prudential Regulatory Authority is watching closely….
Mark Carney says the motivation for raising its counter-cyclical buffer would be to make Britain’s banks safer, not to rein in credit growth.
Updated at 8.31am GMT
Bank shares jump
Bank shares have risen at the start of trading in London.
Investors are welcoming the stress test results (which mean banks will not be forced to raise more capital).
Lloyds, Barclays, RBS and Standard Chartered are all among the top risers on the FTSE 100:
Today’s stress test results should reassure the UK public as we head into the Christmas period, Carney concludes.
Carney also warns that the global economic climate is challenging, with risks ‘rotating’ from emerging markets to advance economies and world growth still subdued.
Mark Carney confirms that the Bank of England is”actively considering” raising its counter-cyclical buffer.
As explained earlier, that would force banks to set aside up to £10bn in extra capital, to protect themselves from a downturn.
Mark Carney’s press conference is being streamed live, here.
BoE governor Mark Carney is holding a press conference now, to explain today’s stress test results – and the latest Financial Stability Report.
Carney says Britain’s banks are significantly stronger than before the financial crisis, which testifies to the value of reforms taken since 2008 to strengthen the banking sector.
He adds that global regulators have now agreed capital reserve levels for banks, to ensure they are strong enough to handle their rirks and avoid another severe financial crisis.
BOE may act on buy-to-let market
The Bank of England has also warned that it might take action to cool the buy-to-let markets.
Our City editor Jill Treanor explains:
The Bank has been warning for many months that it is concerned about the buy-to-let mortgage market.
While it did not take immediate action to cool this sector – where lending has risen 10% in the first nine months of the year – it said it was reviewing the lending criteria adopted by firms and stands “ready to take action.”
Treasury: Banks are getting stronger
A Treasury spokesperson claims that Britain’s banks are “well placed” for the future, even though RBS and Standard Chartered only passed the tests because they’re already taking remedial action.
Here’s HM Treasury’s statement:
“Today’s stress test results are testament to the progress that has been made in strengthening Britain’s banks.
“The government’s plan to protect Britain’s economy and extend opportunities for working families requires a resilient banking system capable of weathering future financial storms both at home and abroad.
“That is why we radically reformed the regulatory system putting the Bank of England back at its heart and it is why Britain’s banks are well placed to help secure the economic recovery.”
Updated at 9.16am GMT
Nationwide is unruffled by the stress test results.
The results of the test confirm that under these stress conditions, Nationwide would remain profitable, with minimum stressed ratios for CET1 and leverage of 19.1% and 4.1% respectively, in each case substantially above the regulatory hurdle rates set for this stress test of 4.5% and 3%
Updated at 7.49am GMT
RBS: We have more work to do
RBS has also issued a statement to the City, confirming that it passed the test – thanks to recent measures taken to strengthen the bank.
RBS’s Tier 1 leverage ratio under the hypothetical adverse scenario was 2.9%. After the impact of management actions, the ratio was 3.0%, which met the 3.0% post-stress minimum Tier 1 leverage ratio threshold set by the BoE.
The public has a particular interest in RBS, having rescued the bank from disaster in 2008.
Ewen Stevenson, RBS’s chief financial officer, says it is getting stronger:
“We are pleased with the progress we have made relative to the 2014 stress test, but recognise we still have much to do to restore RBS to be a strong and resilient bank for our customers.
“During 2015 we have continued to strengthen our core capital ratio and improve our leverage position. Following the divestment of Citizens in October 2015, our pro-forma CET1 ratio at 30 September 2015 would have been 16.2% and our leverage ratio 5.6%.”
Updated at 7.48am GMT
Standard Chartered’s statement
Standard Chartered says it is pleased to have passed the stress test, thanks to the “strategic management actions” which it is taking this year (including raising $5bn from shareholders).
“We are pleased to have met the PRA stress test thresholds through a significant and prolonged stress scenario. The results of the test demonstrate our resilience to a marked slowdown across the key markets in which we operate. The test was conducted on our balance sheet as at the end of 2014.
Since then we have made further significant progress in strengthening our capital position. We are operating at capital levels above current minimum regulatory requirements and have a number of additional levers at our disposal to further manage capital.’
Updated at 7.43am GMT
This chart shows how the banks capital ratios would fall during the crisis scenarios which the BoE tested:
Why such big differences? Because this year’s tests are structured to model a global financial crisis. So Standard Chartered, which is focused on Asia and emerging markets, is particularly hit.
The BoE explains:
For example, the CET1 ratio of Nationwide, with its focus on UK household lending, is projected to fall to a trough just 0.7 percentage points below its end-2014 starting level.
In contrast, with the majority of its exposures in Asia, Standard Chartered’s CET1 ratio is projected to fall by 5.1 percentage points to its low point. These results differ from those of the 2014 stress scenario, which incorporated larger shocks to UK economic activity and house prices.
Barclays has issued a statement, confirming it passed the stress tests:
Under the BoE’s assessment of the effects of the modelled adverse stress scenario, Barclays’ minimum stressed Common Equity Tier 1 (“CET1”) ratio over the period 2015-19 was 7.3% after the impact of strategic management actions.
The minimum stressed CET1 ratio before the impact of strategic management actions of 6.8% exceeded the 4.5% minimum threshold by a significant margin.
(CET1 = common tier equity 1, a broad measure of financial strength)
Updated at 7.33am GMT
The Key Points
My colleague Jill Treanor has been locked in the Bank of England since before 5am, reading the stress tests and the Financial Stability Report.
She’s now broken free, and is tweeting the key points:
BoE wants banks to hold more capital, soon….
Another important development – the Bank of England has signalled that it will soon want Britain’s banks to hold up to £10bn more capital.
It has concluded that the credit cycle has moved to a more ‘normal phase’, which means it will soon be time to deploy its “countercyclical capital buffer”.
That is the amount of extra capital banks must hold in ‘the good times’, to cover them for a rainy day.
It is currently set at 0% of risk-weighted assets, and the BoE is signalling that it should rise to 1% eventually.
“Following the global financial crisis, there was a period of heightened risk aversion and retrenchment from risk-taking.
The system has now moved out of that period.”
The Bank isn’t raising the buffer today — but it is signalling that this could happen in March 2016.
This chart shows how Standard Chartered and RBS were found to have the lowest capital reserves when the stress test scenarios were run:
(a smaller number means the bank is more vulnerable)
In a nutshell:
Here’s the official results from the Bank, confirming that five banks passed the tests straight away – while RBS and Standard Chartered had the weakest positions:
- This stress test did not reveal capital inadequacies for five out of the seven participating banks, based on their balance sheets at end-2014 (Barclays, HSBC, Lloyds Banking Group, Nationwide Building Society and Santander UK).
- The Royal Bank of Scotland Group did not meet its individual capital guidance after management actions in this scenario. In light of the steps that The Royal Bank of Scotland Group has already taken to strengthen its capital position, coupled with its plans for future additional Tier 1 (AT1) issuance, the PRA Board did not require The Royal Bank of Scotland Group to submit a revised capital plan.
- Standard Chartered did not meet its Tier 1 minimum capital requirement of 6% after management actions in this scenario. In light of Standard Chartered’s recent strategy review and the associated steps taken to strengthen its capital position, the PRA Board did not require Standard Chartered to submit a revised capital plan.
Stress tests results released
Here we go!
All seven banks have passed the tests.
Barclays, Lloyds, HSBC, Nationwide and Santander all cleared them easily.
But Royal Bank of Scotland and Standard Chartered had a hitch, and had to raise new capital during the process.
RBS did not achieve the “individual capital guidance test”, while Standard Chartered would have failed, if it hadn’t already raised $5.1bn from shareholders in June.
The Financial Times also reckons that Britain’s biggest banks will all pass this year’s stress test, but it could be a close-run thing….
The test will model a drop in Chinese economic growth from about 7% to 1.7%, causing property prices to crash in China and Hong Kong. It will also examine the impact of a financial market crisis, including the default of several securities trading counterparties.
This year’s test still models tough conditions in the UK economy, which contracts by as much as 2.3%, while residential property prices drop a fifth and there is a prolonged period of deflation and zero interest rates.
Last year the Co-operative Bank was the only failure, but it has been excluded this year because it is in the middle of a drastic restructuring.
“I wouldn’t expect any of the firms to fail this year’s test, but the question will be how close do they come to doing so,” said Steven Hall, partner at KPMG.
Last year, the Co-operative Bank failed the BoE’s stress tests; it simply didn’t have enough capital to ride out a property downturn.
That forced Co-op to start reducing its loan book, meaning it is not taking part this time.
This year’s stress tests put more weight on the global economy, which means closer scrutiny of HSBC and Standard Chartered (due to their large international operations)
Updated at 6.46am GMT
Introduction: Bank of England Stress tests released
We’re about to find out whether Britain’s biggest banks are strong enough to survive another financial crisis.
The Bank of England is about to release the results of its annual stress tests, and also give its view on Britain’s financial stability.
Barclays, HSBC, Santander UK, Standard Chartered, Lloyds, Royal Bank of Scotland, and Nationwide building society, have all been put through their paces, to find how they would handle a new financial crisis.
The scenarios include a ‘hard landing’ in China, a new eurozone recession, a deep dose of deflation, further cuts in UK interest rates and a UK property crash.
The banks will probably all pass. BUT, It’s possible that some may have to cut their payments to shareholders, to ensure they have enough capital to ride out a crisis.
The results are released at 7am GMT, followed by a press conference at 8am sharp.
As well as the stress tests, the Bank of England is also releasing its latest Financial Stability Report. That will show how concerned the BoE is about the UK economy.
It’s possible that the Financial Policy Committee has decided to impose new measures to rein in borrowing, to prevent a credit bubble building up.
City editor Jill Treanor explains:
Speculation that the Bank could impose more stringent capital rules on banks was sparked by remarks last week by Andy Haldane, the Bank’s chief economist, that consumer credit, and personal loans in particular, had been “picking up at a rate of knots”.
His view that the Bank might want to look “fairly carefully” at this area had led to expectations that the Financial Policy Committee (FPC), set up to look for bubbles in financial markets, might use new powers to demand banks hold more capital against riskier lending operations.
I’ll be tracking all the news from the Bank of England through the morning.
Updated at 6.45am GMT
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