The tests simulated a series of cataclysmic events like the last credit crunch including global recession, financial market shocks and independent stress from misconduct costs or penalties. Of the seven banks tested, 73% state-owned RBS was the only one to fail all the capital tests.
The test, which is the first conducted under the Bank’s new approach to stress testing, examined the resilience of the system to a more severe stress than in 2014 and 2015.
RBS finance director Ewen Stevenson said: “We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank’s stress resilience, including resolving outstanding legacy issues.”
The PRA Board also judged that Barclays and Standard Chartered also had capital inadequacies, however, all three have plans in place to build further resilience.
Four out of the seven participating banks – HSBC, Lloyds Banking Group, Nationwide Building Society and Santander UK – all passed the tests, based on their balance sheets at end-2015.
The report outlined the fact the three banks operating principally in domestic UK markets — Lloyds Banking Group, Nationwide and Santander UK — remain well above their hurdle rates throughout the stress. This is in part because of the rising quality of the banks’ mortgage lending, rising property prices and more prudent lending standards.
The BoE also made no change to its recommendation in June 2014 that lenders should restrict high loan-to-income mortgages. No more than 15% of mortgages should be for amounts greater than 4.5 times a borrower’s income, it said, leading to a slowdown in mortgage approvals for around a year.