THE seven biggest lenders will have to show how they would cope with a global economic downturn causing the worst deflationary spiral since the 1930s under a new Bank of England stress test later this year.
The test factors in the potential implications of an international crisis on banks following the most recent examination last December which was more focused on a domestic doomsday scenario.
It would see inflation turning negative for seven successive quarters resulting in the largest fall in UK prices since the 1930s, with interest rates slashed to zero and the wider economy shrinking by 2.3 per cent.
However the hit to Britain’s growth and decline in house prices envisaged would be smaller than those seen in the last test, which looked at a situation which would see a 3.5 per cent contraction in gross domestic product (GDP). A greater focus this time on global risks is seen as likely to have a bigger impact on Asia-focused Standard Chartered as well as HSBC.
They are included in the tests alongside Barclays, Lloyds, Nationwide, Royal Bank of Scotland, and Santander UK. But the Co-operative Bank, which failed last year’s test – but has since put in measures to accelerate the repair of its balance sheet by speeding up the sell-off of its loan book – will not be included.
It has shrunk since last year and its resilience on its own was unlikely to have a “material impact on the resilience of the financial system”, the Bank said.
The new stress scenario, covering a period from the start of 2015 to the end of 2019, will include a dramatic slowdown in China and a eurozone contraction of 2 per cent. Banks and building societies being assessed represent 70 per cent of lending to UK businesses and 75 per cent of mortgage lending.
Bank of England governor Mark Carney said: “Last year’s tests demonstrated how much stronger the core of the UK financial system has become since the financial crisis. The results showed that the post-crisis reforms have put the UK banking system on a stronger footing and made it better able to support the real economy even in the face of a major domestic shock.”
The tests will assess how much a bank’s ratio of capital to loan assets will be hit in the event of severe economic stress. A lender that falls below a minimum 4.5 per cent threshold would face a requirement to shore up its financial position.
Banks will also have to beat a separate 3 per cent minimum leverage threshold, which also measures the ratio of capital to assets but treats all loans as the same rather than using “risk-weighting” based on the idea that some are less risky than others.
Results of the stress test will be published in December.
Why are you making commenting on The National only available to subscribers?
We know there are thousands of National readers who want to debate, argue and go back and forth in the comments section of our stories. We’ve got the most informed readers in Scotland, asking each other the big questions about the future of our country.
Unfortunately, though, these important debates are being spoiled by a vocal minority of trolls who aren’t really interested in the issues, try to derail the conversations, register under fake names, and post vile abuse.
So that’s why we’ve decided to make the ability to comment only available to our paying subscribers. That way, all the trolls who post abuse on our website will have to pay if they want to join the debate – and risk a permanent ban from the account that they subscribe with.
The conversation will go back to what it should be about – people who care passionately about the issues, but disagree constructively on what we should do about them. Let’s get that debate started!
Callum Baird, Editor of The National
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules here