Bank of England toughens bank stress tests

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The Bank of England is increasing the capital buffer rate in its bank stress tests from zero to 0.5 per cent due to risks associated with domestic credit and global risks.

The Financial Policy Committee announced in December it intended to set the UK countercyclical capital buffer rate in the region of 1 per cent in a “standard risk environment”.

The new setting will become binding from 29 March 2017.

The committee said it had concerns about emerging market debt and re-acceleration of credit growth in China in an environment of low inflation amid continued weakness in investment and productivity growth.

It said lower nominal interest rates in some advanced economies were restraining profitability in banking systems and posed challenges for some banking business models.

Domestically, the committee raised concerns about a Brexit vote, credit conditions and buy-to-let mortgage lending.

This year is the first in which the bank will apply its “annual cyclical scenario” framework. The Bank of England announced in October it was fleshing out and toughening the stress test following lessons learnt from the first two tests in 2014 and 2015.

The annual cyclical scenario adapts the severity of the test according to policymakers’ assessments of risk levels across markets. In 2017, an additional “exploratory test” will be introduced that “may not be neatly linked to the financial cycle”.

In this year’s stress scenario, global GDP growth troughes at -1.9 per cent, as it did during the 2008 global financial crisis, and the price of oil falls to $20 a barrel. In the UK, residential property prices fall by 31 per cent.

Last year, Standard Chartered and Royal Bank of Scotland were found to be the weakest of seven lenders tested by the Bank of England, in a scenario whereby oil had dropped to $38 and the global economy had slumped.

HSBC, Barclays, Lloyds Banking Group, Santander and Nationwide passed the test.