Co-op Bank fails BoE stress testing

The Co-operative Bank has failed the Bank of England’s stress test but the other seven major retail lenders are strong enough to deal with tail risks.

Barclays Bank, Co-op Bank, HSBC Bank, Lloyds Banking Group, Nationwide Building Society, Royal Bank of Scotland, Santander UK and Standard Chartered were tested for sharp shocks to the banking system at the end of last year and halfway through this year.

The testing was to determine how each bank’s balance sheet would react to a “coherent, severe ‘tail risk’” scenario.

In the latest test only Co-op Bank’s capital adequacy fell beneath the threshold at the worst point of the model.

Co-op Bank had a public meltdown last year as its former chairman, Paul Flowers, was arrested for meth use and the bank was found to have a £1.5bn capital hole.

At the end of 2013, Co-op Bank, Royal Bank of Scotland and Lloyds Banking Group had inadequate capital. However, improvements over this year have brought them into line, the BoE’s Prudential Regulation Authority says.

Co-op Bank, however, has had to file a new capital plan with the PRA.

The strength of the banking system has improved “significantly” over the past year and the banks would be able to continue core functions during such a crisis, the BoE’s Financial Policy Committee says.

BoE governor Mark Carney says the stress test is the culmination of the work on ensuring the banks have sufficient capital on the balance sheet, individually and as a collective, to survive shocks to the system.

“It is a major component of both our macro- and micro-prudential regimes,” he says.

“As a joint exercise between the PRA and FPC, it demonstrates the major synergies possible across the Bank of England.

“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.”

There will be another stress test next year.

The BoE has also released the Financial Policy Committee’s outlook for financial stability and the systematic risk survey.

Projected CET1 capital ratios in the stress scenario 

  Actual
(end 2013)
Minimum Stressed ratio (before the impact of ‘strategic’ management actions) Minimum Stressed ratio (after the impact of ‘strategic’ management actions) Actual(latest, Q2 or Q3 2014)
Barclays 9.1% 7.0% 7.5% 10.0%
Co-operative Bank Plc 7.2% -2.6% -2.6% 11.5%
HSBC Bank Plc 10.8% 8.7% 8.7% 11.2%
Lloyds Banking Group 10.1% 5.0% 5.3% 12.0%
Nationwide Building Society 14.3% 6.1% 6.7% 17.6%
Royal Bank of Scotland 8.6% 4.6% 5.2% 10.8%
Santander UK 11.6% 7.6% 7.9% 11.8%
Standard Chartered Plc 10.5% 7.1% 8.1% 10.5%

  a) The minimum CET1 ratios shown in the table do not necessarily occur in the same year of the stress scenario for all banks. (b) Actuals are in Q2 2014 for the Co-operative Bank plc, Santander UK plc and Standard Chartered Bank Group; Q3 2014 for Barclays Group,
HSBC Holdings PLC, Lloyds Banking Group, Royal Bank of Scotland Group; and September 2014 for Nationwide Building Society. (c) As a result of Nationwide’s different reporting date, the Bank used an estimated 4 April 2014 balance sheet as the start point of the stress-testing analysis. This results in the difference between the CET1 ratio quoted in this table and that reported in Nationwide’s annual accounts.

Source: Bank of England